0000320121-19-000022.txt : 20190814 0000320121-19-000022.hdr.sgml : 20190814 20190814120749 ACCESSION NUMBER: 0000320121-19-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 49 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190814 DATE AS OF CHANGE: 20190814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELOS CORP CENTRAL INDEX KEY: 0000320121 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 520880974 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08443 FILM NUMBER: 191024476 BUSINESS ADDRESS: STREET 1: 19886 ASHBURN ROAD CITY: ASHBURN STATE: VA ZIP: 20147 BUSINESS PHONE: 7034716000 MAIL ADDRESS: STREET 1: 19886 ASHBURN ROAD CITY: ASHBURN STATE: VA ZIP: 20147 FORMER COMPANY: FORMER CONFORMED NAME: C3 INC DATE OF NAME CHANGE: 19920703 10-Q 1 form10q.htm FORM 10-Q  
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
 
☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended: June 30, 2019
 
◻ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission file number: 001-08443
 
TELOS CORPORATION
(Exact name of registrant as specified in its charter)
 
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)
 
(703) 724-3800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ⌧    No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ⌧      No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ☐
Accelerated filer              
☐
Non-accelerated filer      ☒
Smaller reporting company
☐
 
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes ◻    No ⌧

As of August 7, 2019, the registrant had outstanding 45,158,460 shares of Class A Common Stock, no par value; and 4,037,628 shares of Class B Common Stock, no par value. 
 
1


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

TELOS CORPORATION AND SUBSIDIARIES  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(amounts in thousands)

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Revenue
                        
Services
  
$
34,377
    
$
30,885
    
$
62,414
    
$
59,672
  
Products
    
1,671
      
4,058
      
4,800
      
7,672
  
     
36,048
      
34,943
      
67,214
      
67,344
  
Costs and expenses
                                
Cost of sales - Services
    
25,203
      
21,453
      
45,394
      
41,976
  
Cost of sales - Products
    
830
      
1,412
      
2,829
      
3,058
  
     
26,033
      
22,865
      
48,223
      
45,034
  
       Selling, general and administrative expenses
    
10,437
      
9,922
      
20,795
      
20,176
  
Operating (loss) income
    
(422
)
    
2,156
      
(1,804
)
    
2,134
  
Other income (expense)
                                
       Other income
    
188
      
3
      
193
      
7
  
       Interest expense
    
(1,740
)
    
(1,709
)
    
(3,500
)
    
(3,384
)
(Loss) income before income taxes
    
(1,974
)
    
450
      
(5,111
)
    
(1,243
)
(Provision) benefit for income taxes (Note 7)
    
(20
)
    
(6
)
    
177
      
(65
)
Net (loss) income
    
(1,994
)
    
444
      
(4,934
)
    
(1,308
)
Less:  Net loss (income) attributable to non-controlling interest (Note 2)
    
253
      
(531
)
    
(220
)
    
(765
)
Net loss attributable to Telos Corporation
  
$
(1,741
)
  
$
(87
)
  
$
(5,154
)
  
$
(2,073
)


The accompanying notes are an integral part of these condensed consolidated financial statements.

TELOS CORPORATION AND SUBSIDIARIES  
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(amounts in thousands)




   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2019
    
2018
    
2019
    
2018
  
                         
Net (loss) income
  
$
(1,994
)
  
$
444
    
$
(4,934
)
  
$
(1,308
)
Other comprehensive (loss) income, net of tax:
                                
Foreign currency translation adjustments
    
--
      
(5
)
    
2
      
(7
)
Less: Comprehensive loss (income) attributable to non-controlling interest
    
253
      
(531
)
    
(220
)
    
(765
)
Comprehensive loss attributable to Telos Corporation
  
$
(1,741
)
  
$
(92
)
  
$
(5,152
)
  
$
(2,080
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)

   
June 30, 2019
    
December 31, 2018
  
   
(Unaudited)
        
ASSETS
            
Current assets
            
Cash and cash equivalents
  
$
776
    
$
72
  
Accounts receivable, net of reserve of $306 (Note 1)
    
27,617
      
34,542
  
Inventories, net of obsolescence reserve of $520 (Note 1)
    
4,867
      
4,389
  
Deferred program expenses
    
491
      
244
  
Other current assets
    
2,128
      
1,985
  
Total current assets
    
35,879
      
41,232
  
Property and equipment, net of accumulated depreciation of $30,621 and $28,665, respectively
    
19,074
      
17,426
  
Operating lease right-of-use assets (Note 10)
    
1,727
      
--
  
Goodwill (Note 3)
    
14,916
      
14,916
  
Other assets
    
962
      
915
  
Total assets
  
$
72,558
    
$
74,489
  

The accompanying notes are an integral part of these condensed consolidated financial statements.


TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)

   
June 30, 2019
    
December 31, 2018
  
   
(Unaudited)
        
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT
            
Current liabilities
            
Accounts payable and other accrued payables (Note 5)
  
$
22,113
    
$
21,779
  
Accrued compensation and benefits
    
9,965
      
9,082
  
Contract liabilities (Note 1 and 5)
    
4,363
      
5,232
  
Finance lease obligations – short-term (Note 10)
    
1,168
      
1,115
  
Other current liabilities (Note 10)
    
2,798
      
1,895
  
Total current liabilities
    
40,407
      
39,103
  
                 
Senior term loan, net of unamortized discount and issuance costs (Note 5)
    
11,095
      
10,984
  
Subordinated debt (Note 5)
    
2,759
      
2,597
  
Finance lease obligations – long-term (Note 10)
    
16,271
      
16,865
  
Operating lease liabilities – long-term (Note 10)
    
1,454
      
--
  
Deferred income taxes (Note 7)
    
603
      
818
  
Public preferred stock (Note 6)
    
137,299
      
135,387
  
Other liabilities (Note 7)
    
689
      
838
  
Total liabilities
    
210,577
      
206,592
  
                 
Commitments and contingencies (Note 8)
    
--
      
--
  
                 
Stockholders’ deficit
                
Telos stockholders’ deficit
                
Common stock
    
78
      
78
  
Additional paid-in capital
    
4,310
      
4,310
  
Accumulated other comprehensive income
    
19
      
17
  
Accumulated deficit
    
(144,283
)
    
(139,129
)
Total Telos stockholders’ deficit
    
(139,876
)
    
(134,724
)
Non-controlling interest in subsidiary (Note 2)
    
1,857
      
2,621
  
Total stockholders’ deficit
    
(138,019
)
    
(132,103
)
Total liabilities, redeemable preferred stock, and stockholders’ deficit
  
$
72,558
    
$
74,489
  

The accompanying notes are an integral part of these condensed consolidated financial statements.


TELOS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
 
 
  
Six Months Ended June 30,
  
   
2019
    
2018
  
Operating activities:
            
Net loss
  
$
(4,934
)
  
$
(1,308
)
Adjustments to reconcile net loss to cash provided by operating activities:
                
Dividends of preferred stock as interest expense
    
1,912
      
1,911
  
Depreciation and amortization
    
2,341
      
1,369
  
Amortization of debt issuance costs
    
111
      
95
  
Deferred income tax (benefit) provision
    
(215
)
    
25
  
Other noncash items
    
--
      
381
  
Changes in other operating assets and liabilities
    
6,711
      
1,027
  
Cash provided by operating activities
    
5,926
      
3,500
  
 
                
Investing activities:
                
Capitalized software development costs
    
(1,287
)
    
(836
)
Purchases of property and equipment
    
(2,410
)
    
(989
)
Cash used in investing activities
    
(3,697
)
    
(1,825
)
 
                
Financing activities:
                
Payments under finance lease obligations
    
(541
)
    
(490
)
Distributions to Telos ID Class B member - non-controlling interest
    
(984
)
    
(905
)
Cash used in financing activities
    
(1,525
)
    
(1,395
)
                 
Increase in cash and cash equivalents
    
704
      
280
  
Cash and cash equivalents, beginning of period
    
72
      
600
  
                 
Cash and cash equivalents, end of period
  
$
776
    
$
880
  
                 
Supplemental disclosures of cash flow information:
                
 Cash paid during the period for:
                
Interest
  
$
1,428
    
$
1,227
  
    Income taxes
  
$
39
    
$
19
  
                 
Noncash:
                
Dividends of preferred stock as interest expense
  
$
1,912
    
$
1,911
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

TELOS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
(amounts in thousands)

   
Telos Corporation
              
   
Common
Stock
    
Additional Paid-in
Capital
    
Accumulated
Other Comprehensive Income
    
Accumulated
Deficit
    
Non-Controlling Interest
    
Total
Stockholders’
Deficit
  
For the Three Months Ended June 30, 2019
  
 
Beginning balance
  
$
78
    
$
4,310
    
$
19
    
$
(142,542
)
  
$
2,378
    
$
(135,757
)
Net loss
    
--
      
--
      
--
      
(1,741
)
    
(253
)
    
(1,994
)
Distributions
    
--
      
--
      
--
      
--
      
(268
)
    
(268
)
 
Ending balance
  
$
78
    
$
4,310
    
$
19
    
$
(144,283
)
  
$
1,857
    
$
(138,019
)
For the Three Months Ended June 30, 2018
  
 
Beginning balance
  
$
78
    
$
4,310
    
$
30
    
$
(139,475
)
  
$
1,147
    
$
(133,910
)
Net (loss) income
    
--
      
--
      
--
      
(87
)
    
531
      
444
  
Foreign currency translation loss
    
--
      
--
      
(5
)
    
--
      
--
      
(5
)
Distributions
    
--
      
--
      
--
      
--
      
(905
)
    
(905
)
 
Ending balance
  
$
78
    
$
4,310
    
$
25
    
$
(139,562
)
  
$
773
    
$
(134,376
)
For the Six Months Ended June 30, 2019
  
 
Beginning balance
  
$
78
    
$
4,310
    
$
17
    
$
(139,129
)
  
$
2,621
    
$
(132,103
)
Net (loss) income
    
--
      
--
      
--
      
(5,154
)
    
220
      
(4,934
)
Foreign currency translation gain
    
--
      
--
      
2
      
--
      
--
      
2
  
Distributions
    
--
      
--
      
--
      
--
      
(984
)
    
(984
)
 
Ending balance
  
$
78
    
$
4,310
    
$
19
    
$
(144,283
)
  
$
1,857
    
$
(138,019
)
For the Six Months Ended June 30, 2018
  
 
Beginning balance
  
$
78
    
$
4,310
    
$
32
    
$
(141,370
)
  
$
913
    
$
(136,037
)
Net (loss) income
    
--
      
--
      
--
      
(2,073
)
    
765
      
(1,308
)
Cumulative effect adjustment due to change in accounting policy
    
--
      
--
      
--
      
3,881
      
--
      
3,881
  
Foreign currency translation loss
    
--
      
--
      
(7
)
    
--
      
--
      
(7
)
Distributions
    
--
      
--
      
--
      
--
      
(905
)
    
(905
)
 
Ending balance
  
$
78
    
$
4,310
    
$
25
    
$
(139,562
)
  
$
773
    
$
(134,376
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


TELOS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1.  General and Basis of Presentation
Telos Corporation, together with its subsidiaries (the “Company” or “Telos” or “We”), is an information technology solutions and services company addressing the needs of U.S. Government and commercial customers worldwide. Our principal offices are located at 19886 Ashburn Road, Ashburn, Virginia 20147. The Company was incorporated as a Maryland corporation in October 1971. Our website is www.telos.com.

The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, and Teloworks, Inc., all of whose issued and outstanding share capital is owned by the Company. We have also consolidated the results of operations of Telos Identity Management Solutions, LLC (“Telos ID”) (see Note 2 – Non-controlling Interests). All intercompany transactions have been eliminated in consolidation.

In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons including, but not limited to, the impact of seasonal and short-term variations. We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2018 Annual Report on Form 10-K filed with the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that these condensed consolidated financial statements were issued.

Segment Reporting
Operating segments are defined as components of an enterprise for which separate 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 currently operate in one operating and reportable business segment for financial reporting purposes.  Our Chief Executive Officer is the CODM. The CODM only evaluates profitability based on consolidated results.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (ASC Topic 842)”, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC Topic 842): Targeted Improvements,” which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU 2016-02.

Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While we are currently assessing the impact the adoption of this ASU will have on our condensed consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test, that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

Revenue Recognition
We account for revenue in accordance with Accounting Standard 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 good 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 to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. 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 to each performance obligation based on our best estimate of standalone selling price.

We account for a contract after it has been approved by the parties to the contract, the rights and the payment terms of the parties are identified, the contract has commercial substance and collectability is probable, which is presumed for our U.S. Government customers and prime contractors for which we perform as subcontractors to U.S. Government end-customers.

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 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, 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 Cyber Operations and Defense (“CO&D”) and IT & Enterprise Solutions business groups and for the sale of resold products in Telos ID and CO&D 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 DCAA audits of incurred cost submissions. This resulted in signed final rate agreement letters for 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 have 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 of our contracts do not include award or incentive fees. For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee.  With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.  We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in 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.

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 condensed consolidated balance sheet.

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the condensed 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 condensed consolidated balance sheet 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 international customers revenue 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.

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Federal
  
$
33,774
    
$
32,858
    
$
62,757
    
$
62,569
  
State & Local, and Commercial
    
2,274
      
2,085
      
4,457
      
4,775
  
      Total
  
$
36,048
    
$
34,943
    
$
67,214
    
$
67,344
  


   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Firm fixed-price
  
$
28,857
    
$
28,173
    
$
53,787
    
$
53,094
  
Time-and-materials
    
3,691
      
4,089
      
7,620
      
7,856
  
Cost plus fixed fee
    
3,500
      
2,681
      
5,807
      
6,394
  
      Total
  
$
36,048
    
$
34,943
    
$
67,214
    
$
67,344
  

The following table discloses accounts receivable (in thousands):

   
June 30, 2019
    
December 31, 2018
  
Billed accounts receivable
  
$
10,677
    
$
18,848
  
Unbilled receivables
    
17,246
      
16,000
  
Allowance for doubtful accounts
    
(306
)
    
(306
)
Receivables – net
  
$
27,617
    
$
34,542
  

The following table discloses contract liabilities (in thousands):

   
June 30, 2019
    
December 31, 2018
  
Contract liabilities
  
$
4,363
    
$
5,232
  

As of June 30, 2019, we had $74.1 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 85.4% of our remaining performance obligations as revenue in 2019, an additional 14.2% in 2020, and the balance thereafter.  We recognized revenue of $1.2 million and $3.1 million during the three and six months ended June 30, 2019, respectively, and $1.5 million and $4.1 million during the three and six months ended June 30, 2018, respectively, that was included in the contract liabilities balance at the beginning of each fiscal year.

Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon management’s knowledge of the specific circumstances related to overdue balances. The allowance for doubtful accounts is adjusted based on such evaluation. Accounts receivable balances are written off against the allowance when management deems the balances uncollectible.

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sells certain accounts receivable to a third party, or the "Factor", without recourse to the Company. The Factor initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an accounts receivable until payment is received from the Factor. The balance of the sold receivables may not exceed $10 million. During the three and six months ended June 30, 2019, the Company sold approximately $4.4 million and $9.4 million of accounts receivable, respectively, and recognized a related loss of approximately $15,000 and $32,000 in selling, general and administrative expenses, respectively, for the same period. During the three and six months ended June 30, 2018, the Company sold approximately $2.0 million and $5.1 million of accounts receivable, respectively, and recognized a related loss of approximately $7,000 and $18,000 in selling, general and administrative expenses, respectively, for the same period. As of June 30, 2019, the balance of the sold accounts receivable was approximately $1.4 million, and the related deferred price was approximately $0.2 million. As of June 30, 2018, the balance of the sold accounts receivable was approximately $1.0 million, and the related deferred price was approximately $0.1 million. As of December 31, 2018, the balance of the sold accounts receivable was approximately $0.9 million, and the related deferred price was approximately $0.1 million.

Inventories
Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average method. Substantially all inventories consist of purchased commercial off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. An allowance for obsolete, slow-moving or nonsalable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future. Gross inventory was $5.4 million and $4.9 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $0.5 million as of June 30, 2019 and December 31, 2018.

Software Development Costs
Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed.” Software development costs for software to be sold, leased or otherwise marketed 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. 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 June 30, 2019 and December 31, 2018, we capitalized $4.4 million and $3.1 million of software development costs, respectively, which are included as a part of property and equipment. Amortization expense was $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. Accumulated amortization was $2.2 million and $1.3 million as of June 30, 2019 and December 31, 2018, 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.

Income Taxes
We account for income taxes in accordance with ASC 740, “Income Taxes.”  Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.  We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of June 30, 2019 and December 31, 2018. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.

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.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.

Goodwill
We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31 each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, CO&D, Identity Management, and IT and Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit’s net asset carrying values. Our discounted cash flows required management'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 estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required to be performed and no impairment of goodwill was recorded as of  December 31, 2018. There were no triggering events which would require goodwill impairment consideration during the quarter. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value of our reporting unit 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 charge in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.

Stock-Based Compensation
Compensation cost is recognized based on the requirements of ASC 718, “Stock Compensation,” for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. To date, there have been no grants in 2019. 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 June 30, 2019, there were 1,213,750 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 our common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.  Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the condensed consolidated financial statements.

Other Comprehensive Income
Our functional currency is the U.S. Dollar. For one of our wholly owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Translation gains and losses are included in stockholders’ deficit as a component of accumulated other comprehensive income.

Accumulated other comprehensive income included within stockholders’ deficit consists of the following (in thousands):

   
June 30, 2019
    
December 31, 2018
  
Cumulative foreign currency translation loss
  
$
(88
)
  
$
(90
)
Cumulative actuarial gain on pension liability adjustment
    
107
      
107
  
Accumulated other comprehensive income
  
$
19
    
$
17
  

Note 2.  Non-controlling Interests
On April 11, 2007, Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act. We contributed substantially all of the assets of our Identity Management business line and assigned our rights to perform under our U.S. Government contract with the Defense Manpower Data Center (“DMDC”) to Telos ID at their stated book values. The net book value of assets we contributed totaled $17,000. Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and certain private equity investors (“Investors”) owned 0.001% of the membership interests of Telos ID. On April 20, 2007, we sold an additional 39.999% of the membership interests to the Investor in exchange for $6 million in cash consideration. In accordance with ASC 505, “Equity,” we recognized a gain of $5.8 million. As a result, we owned 60% of Telos ID, and therefore continued to account for the investment in Telos ID using the consolidation method.

On December 24, 2014 (the “Closing Date”), we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) between the Company and the Investors, pursuant to which the Investors acquired from the Company an additional ten percent (10%) membership interest in Telos ID in exchange for $5 million (the “Transaction”). In connection with the Transaction, the Company and the Investors entered into the Second Amended and Restated Operating Agreement (the “Operating Agreement”) governing the business, allocation of profits and losses and management of Telos ID. Under the Operating Agreement, Telos ID is managed by a board of directors comprised of five (5) members (the “Telos ID Board”). The Operating Agreement provides for two classes of membership units, Class A (owned by the Company) and Class B (owned by the Investors). The Class A member (the Company) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint three (3) members of the Telos ID Board. The Class B member (the Investors) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint two (2) members of the Telos ID Board.

Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID board of director seats.

Under the Operating Agreement, the Class A and Class B members each have certain options with regard to the ownership interests held by the other party including the following:

●
Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a “Change in Control”), the Class A member has the option to purchase the entire membership interest of the Class B member.
●
Upon the occurrence of the following events: (i) the involuntary termination of John B. Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.
●
In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.
●
The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such violation.

If either the Class A member or the Class B member elects to sell its interest or buy the other member’s interest upon the occurrence of any of the foregoing events, the purchase price for the interest will be based on an appraisal of Telos ID prepared by a nationally recognized investment banker. If the Class A member fails to satisfy its obligation, subject to the restrictions in the Purchase Agreement, to purchase the interest of the Class B member under the Operating Agreement, the Class B member may require Telos ID to initiate a sales process for the purpose of seeking an offer from a third party to purchase Telos ID that maximizes the value of Telos ID. The Telos ID Board must accept any offer from a bona fide third party to purchase Telos ID if that offer is approved by the Class B member, unless the purchase of Telos ID would violate the terms of any existing line of credit available to the Company and the applicable lender does not consent to that purchase or waive the violation. The sale process is the sole remedy available to the Class B member if the Class A member does not purchase its membership interest.  Under such a forced sale scenario, a sales process would result in both members receiving their proportionate membership interest share of the sales proceeds and both members would always be entitled to receive the same form of consideration.

Pursuant to the Transaction, the Class A and Class B members each own 50% of Telos ID, as mentioned above, and as such each was allocated 50% of the profits (loss), which was $(0.3) million and $0.2 million for the three and six months ended June 30, 2019, respectively, and $0.5 million and $0.8 million for the three and six months ended June 30, 2018, respectively. The Class B member is the non-controlling interest.

Distributions are made to the members only when and to the extent determined by Telos ID’s Board of Directors, in accordance with the Operating Agreement. The Class B member received a total distribution of $0.3 million and $1.0 million for the three and six months ended June 30, 2019, respectively, and $0.9 million for the three and six months ended June 30, 2018.

The following table details the changes in non-controlling interest for the three and six months ended June 30, 2019 and 2018 (in thousands):

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2019
    
2018
    
2019
    
2018
  
Non-controlling interest, beginning of period
  
$
2,378
    
$
1,147
    
$
2,621
    
$
913
  
Net (loss) income
    
(253
)
    
531
      
220
      
765
  
Distributions
    
(268
)
    
(905
)
    
(984
)
    
(905
)
Non-controlling interest, end of period
  
$
1,857
    
$
773
    
$
1,857
    
$
773
  

Note 3.  Goodwill
The goodwill balance was $14.9 million as of June 30, 2019 and December 31, 2018. Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of June 30, 2019 and December 31, 2018, no impairment charges were taken.

Note 4.  Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and expands disclosures about fair value measurements. The framework requires the valuation of financial instruments using a three-tiered approach. The statement requires fair value measurement to be classified and disclosed in one of the following categories:

Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;

Level 2:  Quoted prices in the markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

As of June 30, 2019 and December 31, 2018, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.

As of June 30, 2019 and December 31, 2018, the carrying value of the Company’s 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the “Public Preferred Stock”) was $137.3 million and $135.4 million, respectively, and the estimated fair market value was $74.1 million and $41.4 million, respectively, based on quoted market prices.

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. The estimated fair value of the Facility and long-term debt is based primarily on borrowing rates currently available to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.

Note 5.  Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables
As of June 30, 2019 and December 31, 2018, the accounts payable and other accrued payables consisted of $19.9 million and $18.5 million, respectively, in trade account payables and $2.2 million and $3.3 million, respectively, in accrued payables.

Contract Liabilities 
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 condensed consolidated balance sheets on a net contract basis at the end of each reporting period. As of June 30, 2019 and December 31, 2018, the contract liabilities primarily consisted of product support services.

Enlightenment Capital Credit Agreement
On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as “EnCap”). The Credit Agreement provides for an $11 million senior term loan (the "Loan") with a maturity date of January 25, 2022, subject to acceleration in the event of customary events of default.

All borrowings under the Credit Agreement accrue interest at the rate of 13.0% per annum (the "Accrual Rate"). If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum. After the occurrence and during the continuance of any event of default, the interest rate will increase 2.0%. The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than 10.0% per annum or, during the continuance of an Alternate Interest Rate Event, 11.5% per annum. The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and payment-in-kind. Upon thirty days days prior written notice, the Company may prepay any portion or the entire amount of the Loan.

An amount of approximately $1.1 million was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A separate fee letter executed by the Company and the Agent, dated January 25, 2017, sets forth the fees payable to the Agent in connection with the Credit Agreement.

The Credit Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type. In connection with the Credit Agreement, the Agent has been granted, for the benefit of the Lenders, a security interest in and general lien upon various property of the Company, subject to certain permitted liens and any intercreditor agreement. The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to them under the Credit Agreement or as a secured party under the UCC, in addition to all other rights and remedies available to them.

In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a "Warrant") to Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis. The exercise price is $1.321 per share and each Warrant expires on January 25, 2027. The value of the warrants was determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for the debt instrument.

Effective February 23, 2017, the Credit Agreement was amended to change the required timing of certain post-closing items to allow for more time to complete the legal and administrative requirements around such items. On April 18, 2017, the Credit Agreement was further amended (the “Second Amendment”) to incorporate the parties’ agreement to subordinate certain debt owed by the Company to the affiliated entities of Mr. John R. C. Porter (the “Subordinated Debt”) and to redeem all outstanding shares of the Series A-1 Redeemable Preferred Stock and the Series A-2 Redeemable Preferred Stock, including those owned by Mr. John R.C. Porter and his affiliates, for an aggregate redemption price of $2.1 million.

In connection with the Second Amendment and that subordination of debt, on April 18, 2017, we also entered into Subordination and Intercreditor Agreements (the “Intercreditor Agreements”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”), in which Porter agreed that the Subordinated Debt is fully subordinated to the amended Credit Agreement and related documents, and that required payments, if any, under the Subordinated Debt are permitted only if certain conditions are met.

The Credit Agreement also includes an $825,000 exit fee, which is payable upon any repayment or prepayment of the loan. This amount has been included in the total principal due and treated as an unamortized discount on the debt, which will be amortized over the term of the loan, using the effective interest method at a rate of 15.0%. We incurred fees and transaction costs of approximately $374,000 related to the issuance of the Credit Agreement, which are being amortized over the life of the Credit Agreement.

On March 30, 2018, the Credit Agreement was amended (the “Third Amendment”) to waive any actual or potential non-compliance with covenants in 2017 and to reset the covenants for 2018 measurement periods to more accurately reflect the Company’s projected performance for the year. The measurement against the covenants for consolidated leverage ratio and consolidated fixed charge coverage ratio were agreed to not be measured as of December 31, 2017 and were reset for 2018 measurement periods. Additionally, a minimum revenue covenant and a net working capital covenant were added. In consideration of these amendments, the interest rate on the loan was increased by 1%, which will revert back to the original rate upon achievement of two consecutive quarters of a specified fixed charge coverage ratio as defined in the agreement. The Company may elect to pay the increase in interest expense in cash or by payment-in-kind (by addition to the principal amount of the Loan). The increase in interest expense has been paid in cash.  Contemporaneously with the Third Amendment, Mr. John B. Wood agreed to transfer 50,000 shares of the Company’s Class A Common Stock owned by him to EnCap. We are in compliance with the Credit Agreement’s financial covenants, based on an agreement between the Company and EnCap on the definition of certain input factors that determine the measurement against the covenants.

The carrying amount of the Credit Agreement consisted of the following (in thousands):

   
June 30, 2019
    
December 31, 2018
  
Senior term loan, including exit fee
  
$
11,825
    
$
11,825
  
Less:  Unamortized discount, debt issuance costs, and lender fees
    
(730
)
    
(841
)
Senior term loan, net
  
$
11,095
    
$
10,984
  

We incurred interest expense in the amount of $0.4 million and $0.8 million for each of the three and six months ended June 30, 2019 and 2018, respectively, under the Credit Agreement.

Accounts Receivable Purchase Agreement
On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC (“RCA” or “Buyer”), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the “Purchased Receivables”). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the “Maximum Amount”) at any given time. The Purchase Agreement had an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA. On March 2, 2018, the term of the Purchase Agreement was extended to June 30, 2020. No fee or consideration of any kind was paid in connection with this extension.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. Government, and 85% if the account debtor is not an agency of the U.S. Government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivables are outstanding; (iii) a commitment fee equal to 1% per annum of the Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.

The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company’s right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.

The Company provides a power of attorney to RCA to take certain actions in the Company’s stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA’s interests in the Purchased Receivables.

The Company is liable to the Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.

Financing and Security Agreement
On July 15, 2016, we entered into a Financing and Security Agreement (the “Financing Agreement”) with Action Capital Corporation (“Action Capital”), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the “Acceptable Accounts”). The maximum outstanding principal amount of advances under the Financing Agreement was $5 million. The Financing Agreement had a term of two years years, provided that the Company may terminate it at any time without penalty upon written notice. On August 13, 2018, the Financing Agreement was extended through January 2, 2019. No fee or consideration of any kind was paid in connection with this extension. The Financing Agreement was not extended beyond this date.

Subordinated Debt
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes (“Porter Notes”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions are met. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017. 

On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes. As of June 30, 2019, approximately $947,000 of accrued interest was payable according to the stated interest rate of the Porter Notes.

Note 6.  Redeemable Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006. The Public Preferred Stock was fully accreted as of December 2008. We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at June 30, 2019 and December 31, 2018 was 3,185,586. The Public Preferred Stock is quoted as "TLSRP" on the OTCQB marketplace and the OTC Bulletin Board.

 Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018.

On January 25, 2017, we became parties with certain of our subsidiaries to the Credit Agreement with EnCap. Under the Credit Agreement, we agreed that, until full and final payment of the obligations under the Credit Agreement, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. Various financing documents to which the Public Preferred Stock is subject prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization of payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from June 30, 2019.  This classification is consistent with ASC 210, “Balance Sheet” and 470, “Debt” and the FASB ASC Master Glossary definition of “Current Liabilities.”

ASC 210 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period.  It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so. Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share, and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $105.4 million and $103.5 million as of June 30, 2019 and December 31, 2018, respectively. We accrued dividends on the Public Preferred Stock of $1.0 million and $1.9 million for each of the three and six months ended June 30, 2019 and 2018, respectively, which was recorded as interest expense. Prior to the effective date of ASC 480 on July 1, 2003, such dividends were charged to stockholders’ accumulated deficit.

Note 7.  Income Taxes
The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.  We review and update our estimated annual effective tax rate each quarter. We recorded an approximately $20,000 income tax provision and $177,000 income tax benefit for the three and six months ended June 30, 2019, respectively, and a $6,000 and $65,000 income tax provision for the three and six months ended June 30, 2018, respectively.  For the three and six months ended June 30, 2019 and 2018, our estimated annual effective tax rate was primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income (loss) for all periods.

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 June 30, 2019 and December 31, 2018. Under the Tax Cuts and Jobs Act of 2017 (“Tax Act”), we will be able to use our hanging credit deferred tax liabilities as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences. Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes.  As a result, a deferred tax liability related to goodwill of $603,000 and $818,000 remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018, respectively. The income tax benefit recorded for the six months ended June 30, 2019 is primarily related to this change in deferred tax liability and is due to the state conformity to the indefinite-lived net operating loss provision of the Tax Act.

As a result of the Tax Act, we are subject to several provisions of the Tax Act including computations under Section 162(m) executive compensation limitation and Section 163(j) interest limitation rule. We have considered the impact of each of these provisions in our computation of tax expense for the three and six months ended June 30, 2019.

Under the provisions of ASC 740, we determined that there were approximately $660,000 and $648,000 of unrecognized tax benefits, including $291,000 and $278,000 of related interest and penalties, required to be recorded in other liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months.

Note 8.  Commitments, Contingencies and Subsequent Events

Financial Condition and Liquidity
As described in Note 5 – Current Liabilities and Debt Obligations, we maintain a Credit Agreement with EnCap and a Purchase Agreement with RCA. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by EnCap, RCA, or other potential sources of financing. If we are unable to maintain the Purchase Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace the Purchase Agreement with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.

Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.

Our working capital was $(4.5) million and $2.1 million as of June 30, 2019 and December 31, 2018, respectively. Although no assurances can be given, we expect that our financing arrangements with EnCap and RCA, collectively, and 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.

Legal Proceedings

Costa Brava Partnership III, L.P. and Wynnefield Partners Small Cap Value, L.P.v. Telos Corporation, et al.
As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, on October 17, 2005, Costa Brava Partnership III, L.P. (“Costa Brava”), a holder of our Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers ("Telos Defendants") 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 Class A common stock. As of June 30, 2019, Costa Brava and Wynnefield, directly and through affiliated funds, own 12.7% and 17.4%, respectively, of the outstanding Public Preferred Stock. There have been no material developments in this litigation during the three-month period ended June 30, 2019, and the matter remains pending.

At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to Plaintiffs’ success in relation to any of their assertions in the litigation.  Although there can be no assurance as to the ultimate outcome of the case, the Company and its present and former officers and directors strenuously deny Plaintiffs’ allegations and continue to vigorously defend the matter and oppose all relief sought by Plaintiffs.

Hamot et al. v. Telos Corporation
As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, since August 2, 2007, Messrs. Seth W. Hamot (“Hamot”) and Andrew R. Siegel (“Siegel”), principals of Costa Brava, have been involved in litigation against the Company as Plaintiffs and Counter-defendants in the Circuit Court. Mr. Siegel is a Class D Director of the Company and Mr. Hamot was a Class D Director of the Company until his resignation on March 9, 2018. On or about July 6, 2018, the attorneys representing Mr. Hamot filed a Notice of Substitution of Party in the Circuit Court and the Court of Special Appeals, providing notice that Mr. Steven Tannanbaum was appointed and qualified as the Special Personal Representative of the Estate of Seth Hamot to represent the estate in the litigation.

The Plaintiffs initially alleged that certain documents and records had not been provided to them promptly and were necessary to fulfill their duties as directors of the Company. Subsequently, the Plaintiffs further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood’s service as both CEO and Chairman of the Board was improper and impermissible under the Company’s Bylaws.

The Parties have fully briefed in the Court of Appeals of Maryland the issues related to the damages awarded to the Company on its Counterclaim for interference with one of its prior auditor relationships, and oral argument before the appellate court is scheduled for September 10, 2019.

At this stage of the litigation, in light of the pending review by the Court of Appeals of Maryland of issues related to the lower court’s handling of damages awarded to the Company in connection with Hamot and Siegel’s interference with the auditor relationship, it is impossible to reasonably determine the degree of probability related to the Company’s success in relation to any of the assertions in the foregoing litigation.

Other Litigation
In addition, the Company is a party to litigation arising in the ordinary course of business.  In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's condensed consolidated financial position, results of operations or cash flows.

Subsequent Events
On July 19, 2019, we entered into the Fourth Amendment to Credit Agreement and Waiver; First Amendment to Fee Letter (“Fourth Amendment”) to amend the Credit Agreement.  As a result of the Fourth Amendment, several terms of the Credit Agreement were amended, including the following:
●
The Company borrowed an additional $5 million from the Lenders, increasing the total amount of the principal to $16 million.
●
The maturity date of the Credit Agreement was amended from January 25, 2022 to January 15, 2021.
●
The prepayment price was amended as follows: (a) from January 26, 2019 through January 25, 2020, the prepayment price is 102% of the principal amount, (b) from January 26, 2020 through October 14, 2020, the prepayment price is 101% of the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price will be at par.  However, the prepayment price for the additional $5 million loan attributable to the Fourth Amendment will be at par.
●
The following financial covenants, as defined in the Credit Agreement, were amended and updated: Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio, Consolidated Capital Expenditures, Minimum Fixed Charge Coverage Ratio, and Minimum Consolidated Net Working Capital.
●
Any actual or potential non-compliance with the applicable provisions of the Credit Agreement were waived.
●
The borrowing under the Credit Agreement continues to be collateralized by substantially all of the Company’s assets including inventory, equipment and accounts receivable.
●
The Company paid the Agent a fee of $110,000 in connection with the Fourth Amendment.
●
The exit fee was increased from $825,000 to $1,200,000.

Note 9.  Related Party Transactions
Emmett J. Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996. The amounts paid to this individual as compensation were $76,000 and $234,000 for the three and six months ended June 30, 2019, respectively, and $105,000 and $286,000 for the three and six months ended June 30, 2018, respectively. Additionally, as of June 30, 2019 and December 31, 2018, Mr. Wood owned 810,000 shares of the Company’s Class A Common Stock and 50,000 shares of the Company’s Class B Common Stock.

On March 31, 2015, the Company entered into the Porter Notes. Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017. 

On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extends the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes.

Note 10 – Leases
We account for leases in accordance with ASC Topic 842, “Leases,” which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements.

In accordance with the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets, which represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into operating lease agreements for facilities. Finance lease assets are recorded within property and equipment, net of accumulated depreciation. The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheet based on their contractual due dates. Finance lease liabilities are classified according to 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 which was 5.75% for all operating leases. Our operating lease agreements may include options to extend the lease term or terminate it early. We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options. The weighted average remaining lease terms and discount rates for our operating leases were approximately 4.1 years and 5.75% and for our finance leases were approximately 9.8 years and 5.04% at June 30, 2019. Operating lease expense is recognized as rent expense on a straight-line basis over the lease term. Some of our operating leases contain lease and non-lease components, which we account for as a single component. We evaluate ROU assets for impairment consistent with our property and equipment policy disclosure included in our 2018 Form 10-K.

As of June 30, 2019, operating lease ROU assets were $1.7 million and operating lease liabilities were $1.9 million, of which $1.5 million were classified as noncurrent.

Future minimum lease commitments at June 30, 2019 were as follows (in thousands):

 
Year ending December 31,
  
Operating Leases
    
Finance Leases
  
2019 (excluding the six months ended June 30, 2019)
  
$
285
    
$
1,008
  
2020
    
564
      
2,045
  
2021
    
551
      
2,096
  
2022
    
395
      
2,149
  
2023
    
340
      
2,203
  
2024 and thereafter
    
28
      
12,917
  
Total lease payments
    
2,163
      
22,418
  
Less imputed interest
    
(237
)
    
(4,979
)
Total
  
$
1,926
    
$
17,439
  

The components of lease expense were as follows (in thousands):

   
Three Months Ended
June 30, 2019
    
Six Months Ended
June 30, 2019
  
Operating lease cost
  
$
147
    
$
294
  
                 
Finance lease cost
                
    Amortization of right-of-use assets
  
$
305
    
$
610
  
    Interest on lease liabilities
    
222
      
447
  
Total finance lease cost
  
$
527
    
$
1,057
  

Supplemental cash flow information related to leases was as follows (in thousands):

   
Six Months Ended
June 30, 2019
  
Cash paid for amounts included in the measurement of lease liabilities:
      
Cash flows from operating activities - operating leases
  
$
261
  
Cash flows from operating activities - finance leases
    
987
  
Right-of-use assets obtained in exchange for lease obligations:
        
Operating leases
  
$
245
  

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
  This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company’s Form 10-K for the year ended December 31, 2018, as filed with the SEC.

General
Our goal is to deliver superior IT solutions that meet or exceed our customers’ expectations. We focus on secure enterprise solutions that address the unique requirements of the federal government, the military, and the intelligence community, as well as commercial enterprises that require secure solutions. Our IT solutions consist of the following:

●
Cyber Operations and Defense (“CO&D”):
o
Cyber Security – Solutions and services that assure the security of our customers’ information, systems, and networks, including the Xacta suite for IT governance, risk management, and compliance. Our information and cyber security consulting services include security assessments, digital forensics, and continuous compliance monitoring.

o
Secure Mobility – Design, engineering and delivery of secure solutions that empower the mobile and deployed workforce in business and government.  Our solutions protect sensitive communication while delivering voice, data, and video at the point of work in classified and unclassified environments.

●
Identity Management – Solutions that establish trusted identities in order to ensure authenticated physical access to offices, workstations, and other facilities; secure digital access to databases, host systems, and other IT resources; and protect people and organizations against insider threats.

●
IT and Enterprise Solutions – We have the experience with solution development and global integration to meet the requirements of business and government enterprises with secure IT solutions, from organizational messaging and data visualization to network construction and management.

Backlog
Many of our contracts with the U.S. Government are funded year to year by the procuring U.S. Government agency as determined by the fiscal requirements of the U.S. Government and the respective procuring agency. Such a contracting process results in two distinct categories of backlog: funded and unfunded.  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 not.  Funded backlog consists of the aggregate contract revenues remaining to be earned by us at a given time, but only to the extent, in the case of U.S. Government contracts, when funded by the procuring U.S. Government agency and allotted to the specific contracts.  Unfunded backlog is the difference between total backlog and funded backlog.  Included in unfunded backlog are revenues which may be earned only when and if customers exercise delivery orders and/or renewal options to continue such existing contracts.

A number of contracts that we undertake extend beyond one year and, accordingly, portions of contracts are carried forward from one year to the next as part of the backlog. Because many factors affect the scheduling and continuation of projects, no assurance can be given as to when revenue will be realized on projects included in our backlog.

At June 30, 2019 and 2018, we had total backlog from existing contracts of approximately $255.0 million and $261.4 million, respectively.  Such backlog was $290.8 million at December 31, 2018. Such amounts are the maximum possible value of additional future orders for systems, products, maintenance and other support services presently allowable under those contracts, including renewal options available on the contracts if fully exercised by the customers.
 
Funded backlog as of June 30, 2019 and 2018 was $74.1 million and $70.2 million, respectively. Funded backlog was $79.3 million at December 31, 2018.

While backlog remains a measurement consideration, in recent years we, as well as other U.S. Government contractors, experienced a material change in the manner in which the U.S. Government procures equipment and services. These procurement changes include the growth in the use of General Services Administration ("GSA") schedules which authorize agencies of the U.S. Government to purchase significant amounts of equipment and services. The use of the GSA schedules results in a significantly shorter and much more flexible procurement cycle, as well as increased competition with many companies holding such schedules. Along with the GSA schedules, the U.S. Government is awarding a large number of omnibus contracts with multiple awardees. Such contracts generally require extensive marketing efforts by the multiple awardees to procure business under the omnibus contract through separate task or delivery orders. The use of GSA schedules and omnibus contracts, while generally not providing immediate backlog, provide areas of growth that we continue to aggressively pursue.

Consolidated Results of Operations (Unaudited)
The accompanying condensed consolidated financial statements include the accounts of Telos Corporation and its subsidiaries including Ubiquity.com, Inc., Xacta Corporation, and Teloworks, Inc., all of whose issued and outstanding share capital is owned by Telos Corporation (collectively, the “Company” or “Telos” or “We”). We have also consolidated the results of operations of Telos ID (see Note 2 – Non-controlling Interests). All intercompany transactions have been eliminated in consolidation.

Our operating cycle involves many types of solutions, product and service contracts with varying delivery schedules. Accordingly, results of a particular quarter, or quarter-to-quarter comparisons of recorded sales and operating profits may not be indicative of future operating results and the following comparative analysis should therefore be viewed in such context.
 
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.

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 indefinite delivery/indefinite quantity (“IDIQ”) and government-wide acquisition contracts (“GWAC”), therefore any government customer may utilize the NETCENTS and NETCENTS-2 vehicles to meet its purchasing needs. Consequently, revenue earned on the underlying 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. The period of performance for the original NETCENTS contract ended on September 30, 2013. Previously awarded task orders that contain periods of performance that extended past September 30, 2013, including exercisable option years under existing task orders, were not affected by the contract expiration. We were selected for an award on the NETCENTS replacement contract, NETCENTS-2 Network Operations and Infrastructure Solutions Small Business Companion, on March 27, 2014. Although no protest was filed over the Telos contract award, protests filed by other bidders resulted in a recommendation by the Government Accountability Office (“GAO”) that the U.S. Air Force re-evaluate proposals and make a new source selection decision. Subsequent to the Air Force’s reevaluation of the NETCENTS-2 procurement related to the protests, we were selected for an award on April 3, 2015 and the contract was opened for issuance of new orders in May 2015. 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. However, we have not been awarded significant delivery orders under EAGLE II, or GSA Alliant 2 as it was not ready for agencies to use until July 1, 2018.

On July 22, 2019, the President and Congressional leaders reached an agreement to raise the discretionary spending limits for U.S. Government fiscal years 2020 and 2021 (the U.S. Government’s fiscal year begins on October 1 and ends on September 30) set under the Budget Control Act of 2011 (BCA) and suspend the federal debt ceiling until July 31, 2021. The agreement is intended to prevent the possibility of a partial government shutdown in the fall of 2019 and stabilize appropriations plans for all aspects of federal agencies until after the 2020 presidential election.  The legislation resulting from this agreement, called the Bipartisan Budget Agreement for Fiscal Years 2020 and 2021 (BBA), was subsequently passed by both the House of Representatives and the Senate, and signed into law by the President on August 2, 2019.  The BBA raises spending limits for national defense to $738 billion in FY 2020 and $740.5 billion in FY 2021. Both totals include OCO funding which is not subject to the statutory spending limits established by the BCA. The proposed national security spending in both FY 2020 and 2021 represent an increase over the FY 2019 enacted amount of $716 billion.  Appropriations legislation must still be enacted to authorize spending for the DoD and other government agencies for FY 2020.  If Congress is unable to reach a timely agreement on full year appropriations for FY 2020, there is a risk of future government shutdowns or disruptions, or funding under a continuing resolution.

We anticipate there will continue to be a significant amount of debate and negotiations within the U.S. Government over federal and defense spending. In the context of these negotiations, it is possible that the U.S. Government, or portions of the U.S. Government, could be shut down or disrupted for periods of time, and that government programs could be modified, cut or replaced as part of broader reforms to reduce the federal deficit.

The principal elements of the Company’s operating expenses as a percentage of sales for the three and six months ended June 30, 2019 and 2018 are as follows:

 
Three Months Ended June 30,
  
Six Months Ended June 30,
 
2019
  
2018
  
2019
  
2018
     
(unaudited)
    
               
Revenue
100.0%
  
    100.0%
  
100.0%
  
100.0%
Cost of sales
72.2
  
65.4
  
71.8
  
66.9
Selling, general, and administrative expenses
29.0
  
28.4
  
30.9
  
30.0
Operating (loss) income
(1.2)
  
6.2
  
(2.7)
  
3.1
Other income
0.5
  
----
  
0.3
  
----
Interest expense
(4.8)
  
(4.9)
  
(5.2)
  
(5.0)
(Loss) income before income taxes
(5.5)
  
1.3
  
(7.6)
  
(1.9)
Benefit (provision) for income taxes
----
  
----
  
0.3
  
(0.1)
Net (loss) income
(5.5)
  
1.3
  
(7.3)
  
(2.0)
Less:  Net loss (income) attributable to non-controlling interest
0.7
  
(1.5)
  
(0.3)
  
(1.1)
Net loss attributable to Telos Corporation
   (4.8)%
  
   (0.2)%
  
    (7.6)%
  
    (3.1)%

Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018
Revenue increased by 3.2% to $36.0 million for the second quarter of 2019, from $34.9 million for the same period in 2018. Services revenue increased to $34.4 million for the second quarter of 2019 from $30.9 million for the same period in 2018, primarily attributable to increases in sales of $3.4 million of CO&D’s Cyber Security deliverables, $1.7 million of Identity Management solutions and $0.7 million of IT & Enterprise solutions, offset by a decrease in sales of $2.3 million of CO&D’s Secure Mobility deliverables. The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables. Product revenue decreased to $1.7 million for the second quarter of 2019 from $4.1 million for the same period in 2018, primarily attributable to decreases in sales of $1.6 million of CO&D’s Cyber Security proprietary software deliverables and $1.1 million of Identity Management solutions, offset by an increase in sales of $0.4 million of IT & Enterprise solutions.

Cost of sales increased to $26.0 million for the second quarter of 2019, from $22.9 million for the same period in 2018, primarily due to increases in revenue of $1.1 million, coupled with an increased cost of sales as a percentage of revenue of 6.8%. Cost of sales for services increased by $3.8 million, and as a percentage of services revenue increased by 3.9%, due to a change in the mix of the programs and timing of certain Telos-installed solutions in CO&D’s Secure Mobility deliverables. Cost of sales for products decreased by $0.6 million, and as a percentage of product revenue increased by 14.9% due primarily to a decrease in proprietary software sales which carry lower cost of sales. The increase in cost of sales as a percentage of revenue is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary from period to period, and further can be affected by the timing of deliverables.

Gross profit decreased by 17.1% to $10.0 million for the second quarter of 2019 from $12.1 million for the same period in 2018. Gross margin decreased to 27.8% in the second quarter of 2019, from 34.6% for the same period in 2018. Services gross margin decreased to 26.7% in 2019 from 30.5% in 2018 due to the change in program mix during the period as noted above, and product gross margin decreased to 50.3% in 2019 from 65.2% in 2018, due primarily to a decrease in proprietary software sales.

Selling, general, and administrative expense (SG&A) increased by 5.2% to $10.4 million for the second quarter of 2019, from $9.9 million for the same period in 2018, primarily attributable to increases in labor costs of $0.3 million and legal fees of $0.2 million.

Operating loss was $0.4 million for the second quarter of 2019, compared to an operating income of $2.2 million for the same period in 2018, due primarily to a decrease in gross profit as noted above.

Interest expense increased by 1.8% to $1.7 million for the second quarter of 2019, from $1.7 million for the same period in 2018, primarily due to an increase in interest on an equipment purchase arrangement.

Income tax provision was $20,000 for the second quarter of 2019, compared to $6,000 for the same period in 2018, which is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discreet tax items, based on our expectation of pretax loss for the fiscal year.

Net loss attributable to Telos Corporation was $1.7 million for the second quarter of 2019, compared to $87,000 for the same period in 2018, primarily attributable to the operating loss for the quarter as discussed above.

Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
Revenue decreased by 0.2% to $67.2 million for the six months ended June 30, 2019, from $67.3 million in the same period in 2018. Services revenue increased to $62.4 million for the six months ended June 30, 2019, from $59.7 million for the same period in 2018, primarily attributable to increases in sales of $4.9 million of CO&D’s Cyber Security deliverables, $1.6 million of Identity Management solutions, and $1.2 million of IT & Enterprise solutions, offset by a decrease in sales of $5.0 million of CO&D’s Secure Mobility deliverables. The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables. Product revenue decreased to $4.8 million for the six months ended June 30, 2019, from $7.7 million for the same period in 2018, primarily attributable to decreases in sales of $3.0 million of CO&D’s Cyber Security proprietary software deliverables and $0.2 million of Identity Management solutions, offset by an increase in sales of $0.4 million of IT & Enterprise solutions.

Cost of sales increased by 7.1% to $48.2 million for the six months ended June 30, 2019, from $45.0 million for the same period in 2018, primarily due to increases in services revenue of $2.7 million, coupled with an increased cost of sales as a percentage of revenue of 4.9%. Cost of sales for services increased by $3.4 million, and as a percentage of services revenue increased by 2.4%, due to a change in the mix of the programs and timing of certain Telos-installed solutions in CO&D’s Secure Mobility deliverables. Cost of sales for products decreased by $0.2 million, and as a percentage of product revenue increased by 19.1% due primarily to a decrease in proprietary software sales which carry lower cost of sales. The increase in cost of sales as a percentage of revenue is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary from period to period, and further can be affected by the timing of deliverables.

Gross profit decreased by 14.9% to $19.0 million for the six months ended June 30, 2019, from $22.3 million compared to the same period in 2018, due primarily to the change in the mix of the solutions sold as discussed above.  Gross margin decreased to 28.2% for the six months ended June 30, 2019, from 33.1% in the same period in 2018.

SG&A expense increased by 3.1% to $20.8 million for the six months ended June 30, 2019, from $20.2 million for the same period in 2018, primarily attributable to an increase in labor costs of $1.0 million, offset by a decrease in outside services of $0.4 million.

Operating loss was $1.8 million for the six months ended June 30, 2019, compared to operating income of $2.1 million for the same period in 2018, due primarily to a decrease in gross profit and an increase in SG&A as noted above.

Interest expense increased by 3.4% to $3.5 million for the six months ended June 30, 2019, from $3.4 million for the same period in 2018, primarily due to an increase in interest on an equipment purchase arrangement.

Income tax benefit was $177,000 for the six months ended June 30, 2019, compared to income tax provision of $65,000 for the same period in 2018, which is based on the estimated annual effective tax rate applied to the pretax loss incurred for the six month period plus discreet tax items, adjusted for the income tax benefit previously provided, based on our expectation of pretax loss for the fiscal year.

Net loss attributable to Telos Corporation was $5.2 million for the six months ended June 30, 2019, compared to $2.1 million for the same period in 2018, primarily attributable to the operating loss as discussed above.

Liquidity and Capital Resources
As described in Note 5 – Current Liabilities and Debt Obligations, we maintain a Credit Agreement with EnCap and a Purchase Agreement with RCA. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by EnCap, RCA, or other potential sources of financing. If we are unable to maintain the Purchase Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace the Purchase Agreement with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.

Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.

Our working capital was $(4.5) million and $2.1 million as of June 30, 2019 and December 31, 2018, respectively. Although no assurances can be given, we expect that our financing arrangements with EnCap and RCA, collectively, and 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 provided by operating activities was $5.9 million for the six months ended June 30, 2019, compared to $3.5 million for the same period in 2018. Cash provided by or used in operating activities is primarily driven by the Company’s operating income, the timing of receipt of customer payments, the timing of its 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, net loss was $4.9 million for the six months ended June 30, 2019, compared to $1.3 million for the six months ended June 30, 2018.

Cash used in investing activities was approximately $3.7 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively, due primarily to the purchase of property and equipment of $2.4 million and $1.0 million for the six months ended June 30, 2019 and 2018, respectively, and the capitalization of software development costs of $1.3 million and $0.8 million for the six months ended June 30, 2019 and 2018, respectively.

Cash used in financing activities for the six months ended June 30, 2019 was $1.5 million, compared to $1.4 million for the same period in 2018, primarily attributable to distribution of $1.0 million to the Telos ID Class B member and payments under finance leases for the six months ended June 30, 2019, compared to distribution of $0.9 million to the Telos ID Class B member and payments under finance leases for the six months ended June 30, 2018.

Additionally, our capital structure consists of redeemable preferred stock and common stock. The capital structure is complex and requires an understanding of the terms of the instruments, certain restrictions on scheduled payments and redemptions of the various instruments, and the interrelationship of the instruments especially as it relates to the subordination hierarchy. Therefore, a thorough understanding of how our capital structure impacts our liquidity is necessary and, accordingly, we have disclosed the relevant information about each instrument as follows:

Enlightenment Capital Credit Agreement
On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as “EnCap”). The Credit Agreement provides for an $11 million senior term loan (the "Loan") with a maturity date of January 25, 2022, subject to acceleration in the event of customary events of default.

All borrowings under the Credit Agreement will accrue interest at the rate of 13.0% per annum (the “Accrual Rate”). If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum. After the occurrence and during the continuance of any event of default, the interest rate will increase 2.0%. The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than 10.0% per annum or, during the continuance of an Alternate Interest Rate Event, 11.5% per annum. The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and payment-in-kind. Upon thirty days prior written notice, the Company may prepay any portion or the entire amount of the Loan.

An amount of approximately $1.1 million was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A separate fee letter executed by the Company and the Agent, dated January 25, 2017, sets forth the fees payable to the Agent in connection with the Credit Agreement.

The Credit Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type. In connection with the Credit Agreement, the Agent has been granted, for the benefit of the Lenders, a security interest in and general lien upon various property of the Company, subject to certain permitted liens and any intercreditor agreement. The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to them under the Credit Agreement or as a secured party under the UCC, in addition to all other rights and remedies available to them.

In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a "Warrant") to Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis. The exercise price is $1.321 per share and each Warrant expires on January 25, 2027. The value of the warrants were determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for the debt instrument.

Effective February 23, 2017, the Credit Agreement was amended to change the required timing of certain post-closing items to allow for more time to complete the legal and administrative requirements around such items. On April 18, 2017, the Credit Agreement was further amended (the “Second Amendment”) to incorporate the parties’ agreement to subordinate certain debt owed by the Company to the affiliated entities of Mr. John R. C. Porter (the “Subordinated Debt”) and to redeem all outstanding shares of the Series A-1 Redeemable Preferred Stock and the Series A-2 Redeemable Preferred Stock, including those owned by Mr. John R.C. Porter and his affiliates, for an aggregate redemption price of $2.1 million.

In connection with the Second Amendment and that subordination of debt, on April 18, 2017, we also entered into Subordination and Intercreditor Agreements (the “Intercreditor Agreements”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”), in which Porter agreed that the Subordinated Debt is fully subordinated to the amended Credit Agreement and related documents, and that required payments, if any, under the Subordinated Debt are permitted only if certain conditions are met.

The Credit Agreement also included an $825,000 exit fee, which is payable upon any repayment or prepayment of the loan. This amount has been included in the total principal due and treated as an unamortized discount on the debt, which will be amortized over the term of the loan, using the effective interest method at a rate of 15.0%. We incurred fees and transaction costs of approximately $374,000 related to the issuance of the Credit Agreement, which are being amortized over the life of the Credit Agreement.

On March 30, 2018, the Credit Agreement was amended (the “Third Amendment”) to waive any actual or potential non-compliance with covenants in 2017 and to reset the covenants for 2018 measurement periods to more accurately reflect the Company’s projected performance for the year. The measurement against the covenants for consolidated leverage ratio and consolidated fixed charge coverage ratio were agreed to not be measured as of December 31, 2017 and were reset for 2018 measurement periods. Additionally, a minimum revenue covenant and a net working capital covenant were added. In consideration of these amendments, the interest rate on the loan was increased by 1%, which will revert back to the original rate upon achievement of two consecutive quarters of a specified fixed charge coverage ratio as defined in the agreement. The Company may elect to pay the increase in interest expense in cash or by payment-in-kind (by addition to the principal amount of the Loan).  The increase in interest expense has been paid in cash. Contemporaneously with the Third Amendment, Mr. John B. Wood agreed to transfer 50,000 shares of the Company’s Class A Common Stock owned by him to EnCap. We are in compliance with the Credit Agreement’s financial covenants, based on an agreement between the Company and EnCap on the definition of certain input factors that determine the measurement against the covenants.

On July 19, 2019, we entered into the Fourth Amendment to Credit Agreement and Waiver; First Amendment to Fee Letter (“Fourth Amendment”) to amend the Credit Agreement.  As a result of the Fourth Amendment, several terms of the Credit Agreement were amended, including the following:
●
The Company borrowed an additional $5 million from the Lenders, increasing the total amount of the principal to $16 million.
●
The maturity date of the Credit Agreement was amended from January 25, 2022 to January 15, 2021.
●
The prepayment price was amended as follows: (a) from January 26, 2019 through January 25, 2020, the prepayment price is 102% of the principal amount, (b) from January 26, 2020 through October 14, 2020, the prepayment price is 101% of the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price will be at par.  However, the prepayment price for the additional $5 million loan attributable to the Fourth Amendment will be at par.
●
The following financial covenants, as defined in the Credit Agreement, were amended and updated: Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio, Consolidated Capital Expenditures, Minimum Fixed Charge Coverage Ratio, and Minimum Consolidated Net Working Capital.
●
Any actual or potential non-compliance with the applicable provisions of the Credit Agreement were waived.
●
The borrowing under the Credit Agreement continues to be collateralized by substantially all of the Company’s assets including inventory, equipment and accounts receivable.
●
The Company paid the Agent a fee of $110,000 in connection with the Fourth Amendment.
●
The exit fee was increased from $825,000 to $1,200,000.

We incurred interest expense in the amount of $0.4 million and $0.8 million for each of the three and six months ended June 30, 2019 and 2018, respectively, under the Credit Agreement.

Accounts Receivable Purchase Agreement
On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC (“RCA” or “Buyer”), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the “Purchased Receivables”). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the “Maximum Amount”) at any given time. The Purchase Agreement had an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA. On March 2, 2018, the term of the Purchase Agreement was extended to June 30, 2020. No fee or consideration of any kind was paid in connection with this extension.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. Government, and 85% if the account debtor is not an agency of the U.S. Government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivables are outstanding; (iii) a commitment fee equal to 1% per annum of the Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.

The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company’s right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.

The Company provides a power of attorney to RCA to take certain actions in the Company’s stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA’s interests in the Purchased Receivables.

The Company is liable to the Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.

Financing and Security Agreement
On July 15, 2016, we entered into a Financing and Security Agreement (the “Financing Agreement”) with Action Capital Corporation (“Action Capital”), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the “Acceptable Accounts”). The maximum outstanding principal amount of advances under the Financing Agreement was $5 million. The Financing Agreement had a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. On August 13, 2018, the Financing Agreement was extended through January 2, 2019. No fee or consideration of any kind was paid in connection with this extension. The Financing Agreement was not extended beyond this date.

Subordinated Debt
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes (“Porter Notes”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions are met. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017.

 On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes. As of June 30, 2019, approximately $947,000 of accrued interest was payable according to the stated interest rate of the Porter Notes.

Public Preferred Stock  
A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006.  The Public Preferred Stock was fully accreted as of December 2008.  We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at June 30, 2019 and December 31, 2018 was 3,185,586. The Public Preferred Stock is quoted as “TLSRP” on the OTCQB marketplace and the OTC Bulletin Board.

Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018.

On January 25, 2017, we became parties with certain of our subsidiaries to the Credit Agreement with EnCap. Under the Credit Agreement, we agreed that, until full and final payment of the obligations under the Credit Agreement, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. Various financing documents to which the Public Preferred Stock is subject prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization of payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from June 30, 2019.  This classification is consistent with ASC 210, “Balance Sheet” and 470, “Debt” and the FASB ASC Master Glossary definition of “Current Liabilities.”

ASC 210 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so. Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share, and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $105.4 million and $103.5 million as of June 30, 2019 and December 31, 2018, respectively. We accrued dividends on the Public Preferred Stock of $1.0 million and $1.9 million for each of the three and six months ended June 30, 2019 and 2018, respectively, which was recorded as interest expense. Prior to the effective date of ASC 480 on July 1, 2003, such dividends were charged to stockholders’ accumulated deficit.

Recent Accounting Pronouncements
See Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Critical Accounting Policies
Except as set forth below, during the three months ended June 30, 2019, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on April 1, 2019.

Leases
In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (ASC Topic 842)”, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC Topic 842): Targeted Improvements,” which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU 2016-02.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk
 None.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2019 was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION
 Item 1.    Legal Proceedings
 Information regarding legal proceedings may be found in Note 8 – Commitments, Contingencies and Subsequent Events to the condensed consolidated financial statements.

Item 1A.  Risk Factors
There were no material changes in the period ended June 30, 2019 in our risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.    Defaults upon Senior Securities

12% Cumulative Exchangeable Redeemable Preferred Stock
Through November 21, 1995, we had the option to pay dividends in additional shares of Public Preferred Stock in lieu of cash (provided there were no restrictions on payment as further discussed below). As more fully explained in the next paragraph, dividends are payable by us, when and if declared by the Board of Directors, commencing June 1, 1990, and on each six month anniversary thereof. Dividends in additional shares of the Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. Dividends for the years 1992 through 1994, and for the dividend payable June 1, 1995, were accrued under the assumption that such dividends would be paid in additional shares of preferred stock and were valued at $4.0 million. Had we accrued these dividends on a cash basis, the total amount accrued would have been $15.1 million. However, as a result of the redemption of the 410,000 shares of the Public Preferred Stock in November 1998, such amounts were reduced and adjusted to $3.5 million and $13.4 million, respectively. As more fully disclosed in Note 6 – Redeemable Preferred Stock, in the second quarter of 2006, we accrued an additional $9.9 million in interest expense to reflect our intent to pay cash dividends in lieu of stock dividends, for the years 1992 through 1994, and for the dividend payable June 1, 1995. We have accrued $105.4 million and $103.5 million in cash dividends as of June 30, 2019 and December 31, 2018, respectively.
 
Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018.

Item 4.    Mine Safety Disclosures
Not applicable.

Item 5.    Other Information
None.

Item 6.    Exhibits

Exhibit
Number
Description of Exhibit
   
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
101.LAB**
XBRL Taxonomy Extension Label Linkbase
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
   
*   filed herewith
** in accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  

Date:  August 14, 2019
  
TELOS CORPORATION
     
   
/s/ John B. Wood
   
John B. Wood
Chief Executive Officer (Principal Executive Officer)


   
 
/s/ Michele Nakazawa
   
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)

43
 EX-31.1 2 ex31_1.htm EXHIBIT 31.1
Exhibit 31.1

CERTIFICATION
 
I, John B. Wood, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of Telos Corporation;
 
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)    Disclosed  in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of registrant's board of directors:
 
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting  which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 


 
Date:   August 14, 2019
/s/ John B. Wood
John B. Wood
Chief Executive Officer (Principal Executive Officer)
 
EX-31.2 3 ex31_2.htm EXHIBIT 31.2
Exhibit 31.2

CERTIFICATION
 
I, Michele Nakazawa, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of Telos Corporation;
 
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)    Disclosed  in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.    The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of registrant's board of directors:
 
a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting  which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 


 
Date:  August 14, 2019
 /s/ Michele Nakazawa
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)
EX-32 4 ex32.htm EXHIBIT 32
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 In connection with the Quarterly Report of Telos Corporation (the "Company") on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, John B. Wood and Michele Nakazawa, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:   August 14, 2019
 /s/ John B. Wood
John B. Wood
Chief Executive Officer (Principal Executive Officer)

 

Date:   August 14, 2019
 /s/ Michele Nakazawa
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)
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serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 8</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Commitments, Contingencies and Subsequent Events</font></div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;"><font style="background-color: #FFFFFF;">Financial Condition and Liquidity</font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><!--Anchor-->As described in Note 5 &#8211; Current Liabilities and Debt Obligations, we maintain a Credit Agreement with EnCap and a Purchase Agreement with RCA. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by EnCap, RCA, or other potential sources of financing. If we are unable to maintain the Purchase Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace the Purchase Agreement with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Our working capital was $(4.5) million and $2.1 million as of June 30, 2019 and December 31, 2018, respectively. Although no assurances can be given, we expect that our financing arrangements with EnCap and RCA, collectively, and 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.</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;"><font style="background-color: #FFFFFF;">Legal Proceedings</font></div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Costa Brava Partnership III, L.P. and Wynnefield Partners Small Cap Value, L.P.v. Telos Corporation, et al.</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, on October 17, 2005, Costa Brava Partnership III, L.P. (&#8220;Costa Brava&#8221;), a holder of our Public Preferred Stock, </font>instituted litigation <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">against the Company and certain past and present directors and officers ("Telos Defendants") in the Circuit Court for Baltimore City, Maryland (the &#8220;Circuit Court&#8221;). A second holder of the Company&#8217;s Public Preferred Stock, Wynnefield Small Cap Value, L.P. (&#8220;Wynnefield&#8221;), subsequently intervened as a co-Plaintiff (Costa Brava and Wynnefield are hereinafter referred to as &#8220;Plaintiffs&#8221;).&#160; On February 27, 2007, Plaintiffs added, as an additional defendant, Mr. John R.C. Porter, a holder of the Company&#8217;s Class A common stock. As of June 30, 2019, Costa Brava and Wynnefield</font>, directly and through affiliated funds, <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">own 12.7% and 17.4%, respectively, of the outstanding Public Preferred Stock. </font>There have been no material developments in this litigation during the three-month period ended June 30, 2019, and the matter remains pending.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to Plaintiffs&#8217; success in relation to any of their assertions in the litigation.&#160; Although there can be no assurance as to the ultimate outcome of the case, the Company and its present and former officers and directors strenuously deny Plaintiffs&#8217; allegations and continue to vigorously defend the matter and oppose all relief sought by Plaintiffs.</div><div><br /></div><div style="text-align: left; margin-right: 1.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;"><font style="background-color: #FFFFFF;">Hamot et al. v. Telos Corporation</font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, </font>since August 2, 2007, Messrs. Seth W. Hamot (&#8220;Hamot&#8221;) and Andrew R. Siegel (&#8220;Siegel&#8221;), principals of Costa Brava, have been involved in litigation against the Company as Plaintiffs and Counter-defendants in the Circuit Court. Mr. Siegel is a Class D Director of the Company and Mr. Hamot was a Class D Director of the Company until his resignation on March 9, 2018. On or about July 6, 2018, the attorneys representing Mr. Hamot filed a Notice of Substitution of Party in the Circuit Court and the Court of Special Appeals, providing notice that Mr. Steven Tannanbaum was appointed and qualified as the Special Personal Representative of the Estate of Seth Hamot to represent the estate in the litigation.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Plaintiffs initially alleged that certain documents and records had not been provided to them promptly and were necessary to fulfill their duties as directors of the Company. Subsequently, the Plaintiffs further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood&#8217;s service as both CEO and Chairman of the Board was improper and impermissible under the Company&#8217;s Bylaws.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Parties have fully briefed in the Court of Appeals of Maryland the issues related to the damages awarded to the Company on its Counterclaim for interference with one of its prior auditor relationships, and oral argument before the appellate court is scheduled for September 10, 2019.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">At this stage of the litigation, in light of the pending review by the Court of Appeals of Maryland of issues related to the lower court&#8217;s handling of damages awarded to the Company in connection with Hamot and Siegel&#8217;s interference with the auditor relationship, it is impossible to reasonably determine the degree of probability related to the Company&#8217;s success in relation to any of the assertions in the foregoing litigation.</div><div><br /></div><div style="text-align: left; margin-right: 48pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;"><font style="background-color: #FFFFFF;">Other Litigation</font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In addition, the Company is a party to litigation arising in the ordinary course of business.&#160; In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's condensed consolidated financial position, results of operations or cash flows.</div><div><br /></div><div style="text-align: left; margin-right: 48pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Subsequent Events</div><div style="text-align: left; text-indent: 18pt; 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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 condensed consolidated balance sheets on a net contract basis at the end of each reporting period. As of June 30, 2019 and December 31, 2018, the contract liabilities primarily consisted of product support services.</div><div><br /></div><div style="text-align: left; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Enlightenment Capital Credit Agreement</div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as &#8220;EnCap&#8221;). The Credit Agreement provides for an $11 million senior term loan (the "Loan") with a maturity date of January 25, 2022, subject to acceleration in the event of customary events of default.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">All borrowings under the Credit Agreement accrue interest at the rate of 13.0% per annum (the "Accrual Rate"). If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum. After the occurrence and during the continuance of any event of default, the interest rate will increase 2.0%. The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than 10.0% per annum or, during the continuance of an Alternate Interest Rate Event, 11.5% per annum. The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and payment-in-kind. Upon thirty days days prior written notice, the Company may prepay any portion or the entire amount of the Loan.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">An amount of approximately $1.1 million was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A separate fee letter executed by the Company and the Agent, dated January 25, 2017, sets forth the fees payable to the Agent in connection with the Credit Agreement.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Credit Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type. In connection with the Credit Agreement, the Agent has been granted, for the benefit of the Lenders, a security interest in and general lien upon various property of the Company, subject to certain permitted liens and any intercreditor agreement. The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to them under the Credit Agreement or as a secured party under the UCC, in addition to all other rights and remedies available to them.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a "Warrant") to Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis. The exercise price is $1.321 per share and each Warrant expires on January 25, 2027. The value of the warrants was determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for the debt instrument.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 7.2pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Effective February 23, 2017, the Credit Agreement was amended to change the required timing of certain post-closing items to allow for more time to complete the legal and administrative requirements around such items. On April 18, 2017, the Credit Agreement was further amended (the &#8220;Second Amendment&#8221;) to incorporate the parties&#8217; agreement to subordinate certain debt owed by the Company to the affiliated entities of Mr. John R. C. 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Porter (together referenced as &#8220;Porter&#8221;), in which Porter agreed that the Subordinated Debt is fully subordinated to the amended Credit Agreement and related documents, and that required payments, if any, under the Subordinated Debt are permitted only if certain conditions are met.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Credit Agreement also includes an $825,000 exit fee, which is payable upon any repayment or prepayment of the loan. This amount has been included in the total principal due and treated as an unamortized discount on the debt, which will be amortized over the term of the loan, using the effective interest method at a rate of 15.0%. 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or &#8220;Buyer&#8221;), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the &#8220;Purchased Receivables&#8221;). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the<font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif; color: #000000;">&#160;</font>&#8220;Maximum Amount&#8221;) at any given time. The Purchase Agreement had an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA. On March 2, 2018, the term of the Purchase Agreement was extended to June 30, 2020. No fee or consideration of any kind was paid in connection with this extension.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. Government, and 85% if the account debtor is not an agency of the U.S. Government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivables are outstanding; (iii) a commitment fee equal to 1% per annum of the Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company&#8217;s right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Company provides a power of attorney to RCA to take certain actions in the Company&#8217;s stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA&#8217;s interests in the Purchased Receivables.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Company is liable to the Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Financing and Security Agreement</div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif; color: #000000;">On July 15, 2016, we entered into a Financing and Security Agreement (the &#8220;Financing Agreement&#8221;) with Action Capital Corporation&#160;(&#8220;Action Capital&#8221;), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the &#8220;Acceptable Accounts&#8221;). The maximum outstanding principal amount of advances under the Financing Agreement was $5 million. The Financing Agreement had a term of two years years, provided that the Company may terminate it at any time without penalty upon written notice. </font>On August 13, 2018, the Financing Agreement was extended through January 2, 2019. No fee or consideration of any kind was paid in connection with this extension. The Financing Agreement was not extended beyond this date.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Subordinated Debt</div><div style="text-align: left; text-indent: 18pt; margin-right: 8.85pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes (&#8220;Porter Notes&#8221;) with affiliated entities of Mr. John R. C. Porter (together referenced as &#8220;Porter&#8221;).&#160;Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock.&#160;Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the &#8220;Subordination Agreements&#8221;) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions are met. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015.&#160;The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017.&#160;</div><div><br /></div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif; color: #000000;">On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, </font>and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes. As of June 30, 2019, approximately $947,000 of accrued interest was payable according to the stated interest rate of the Porter Notes.</div><div><br /></div></div></div> 0.130 0.150 2022-01-25 2017-07-01 2022-07-25 2021-01-15 2022-01-25 2017-07-01 2022-07-25 9965000 9082000 -215000 25000 818000 603000 2341000 1369000 1000000 1900000 1900000 1000000 103500000 105400000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 4</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Fair Value Measurements</font></div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">The accounting standard for fair value measurements provides a framework for measuring fair value and expands disclosures about fair value measurements. The framework requires the valuation of financial instruments using a three-tiered approach. The statement requires fair value measurement to be classified and disclosed in one of the following categories:</font></div><div><br /></div><div style="text-align: left; margin-right: 18pt; margin-left: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">Level 1:&#160; Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;</font></div><div><br /></div><div style="text-align: left; margin-right: 18pt; margin-left: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">Level 2:&#160; Quoted prices in the markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or</font></div><div><br /></div><div style="text-align: left; margin-left: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">Level 3:&#160; Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).</font></div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">As of June 30, 2019 and December 31, 2018, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.</font></div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF;">As of June 30, 2019 and December 31, 2018, the carrying value of the Company&#8217;s 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the &#8220;Public Preferred Stock&#8221;) was $137.3 million and $135.4 million, respectively, and the estimated fair market value was $74.1 million and $41.4 million, respectively, based on quoted market prices.</font></div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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. The estimated fair value of the Facility and long-term debt is based primarily on borrowing rates currently available to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.</div><div><br /></div></div></div> 17439000 2096000 305000 610000 22418000 2203000 12917000 2045000 0.0504 4979000 222000 447000 987000 1008000 2149000 P9Y9M18D 5800000 14916000 14916000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Goodwill</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, &#8220;Intangibles - Goodwill and Other,&#8221; which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31 each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, CO&amp;D, Identity Management, and IT and Enterprise Solutions, of which goodwill is housed in the CO&amp;D reporting unit, in comparison to the reporting unit&#8217;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 estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company&#8217;s assessment resulted in a fair value that was greater than the Company&#8217;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&#160; December 31, 2018. There were no triggering events which would require goodwill impairment consideration during the quarter. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value of our reporting unit 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 charge in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.</div><div><br /></div></div></div> <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: justify; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 3</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Goodwill</font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">The goodwill balance was $14.9 million as of June 30, 2019 and December 31, 2018. </font>Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of June 30, 2019 and December 31, 2018, no impairment charges were taken.</div><div><br /></div></div></div> 450000 -1974000 -1243000 -5111000 6000 20000 -177000 65000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 7</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Income Taxes</font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.&#160; We review and update our estimated annual effective tax rate each quarter. W</font>e recorded an approximately $20,000 income tax provision and $177,000 income tax benefit for the three and six months ended June 30, 2019, respectively, and a $6,000 and $65,000 income tax provision for the three and six months ended June 30, 2018, respectively.&#160; For the three and six months ended June 30, 2019 and 2018, our estimated annual effective tax rate was primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income (loss) for all periods.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.&#160;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 June 30, 2019 and December 31, 2018.&#160;Under the Tax Cuts and Jobs Act of 2017 (&#8220;Tax Act&#8221;), we will be able to use our hanging credit deferred tax liabilities as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences. Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes.&#160; As a result, a deferred tax liability related to goodwill of $603,000 and $818,000 remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018, respectively. The income tax benefit recorded for the six months ended June 30, 2019 is primarily related to this change in deferred tax liability and is due to the state conformity to the indefinite-lived net operating loss provision of the Tax Act.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">As a result of the Tax Act, we are subject to several provisions of the Tax Act including computations under Section 162(m) executive compensation limitation and Section 163(j) interest limitation rule. We have considered the impact of each of these provisions in our computation of tax expense for the three and six months ended June 30, 2019.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Under the provisions of ASC 740, we determined that<font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;"> there were approximately $660,000 and $648,000 of unrecognized tax benefits, </font>including $291,000 and $278,000 of related interest and penalties, <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;"> required to be recorded </font>in other liabilities in the condensed consolidated balance sheets <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">as of June 30, 2019 and December 31, 2018, respectively. </font>We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months.</div><div><br /></div></div></div> <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Income Taxes</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for income taxes in accordance with ASC 740, &#8220;Income Taxes.&#8221;&#160; Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.&#160; 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.&#160; 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.&#160; 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.&#160; 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.&#160; 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 June 30, 2019 and December 31, 2018.&#160;As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.</div><div><br /></div></div></div> 19000 39000 -1027000 -6711000 947000 82000 76000 162000 151000 76000 82000 162000 151000 1709000 1740000 3500000 3384000 400000 400000 800000 800000 1227000 1428000 520000 520000 4900000 5400000 4389000 4867000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;"><font style="background-color: #FFFFFF;">Inventories </font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average method. Substantially all inventories consist of purchased commercial off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. An allowance for obsolete, slow-moving or nonsalable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future. 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We contributed substantially all of the assets of our Identity Management business line and assigned our rights to perform under our U.S. Government contract with the Defense Manpower Data Center (&#8220;DMDC&#8221;) to Telos ID at their stated book values. The net book value of assets we contributed totaled $17,000. Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and </font>certain private equity investors (&#8220;Investors&#8221;)<font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;"> owned 0.001% of the membership interests of Telos ID. On April 20, 2007, we sold an additional 39.999% of the membership interests to the Investor in exchange for $6 million in cash consideration. 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Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.</div></td></tr></table></div></div><div style="text-align: left;"><div><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="font-family: 'Times New Roman', Times, serif; font-size: 10pt; width: 100%; text-align: left; color: #000000;"><tr><td style="width: 18pt;"></td><td style="width: 18pt; vertical-align: top; align: right; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">&#9679;</td><td style="width: auto; vertical-align: top; text-align: left;"><div style="color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.</div></td></tr></table></div></div><div style="text-align: left;"><div><table cellpadding="0" cellspacing="0" class="DSPFListTable" style="font-family: 'Times New Roman', Times, serif; font-size: 10pt; width: 100%; text-align: left; color: #000000;"><tr><td style="width: 18pt;"></td><td style="width: 18pt; vertical-align: top; align: right; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">&#9679;</td><td style="width: auto; vertical-align: top; text-align: left;"><div style="color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. 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vertical-align: bottom; width: 1%; padding-bottom: 3px; background-color: #FFFFFF;">&#160;</td></tr></table><div><br /></div></div></div> 0.350 0.00001 -1525000 -1395000 -3697000 -1825000 531000 -253000 220000 765000 5926000 3500000 -1741000 -87000 -5154000 -2073000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Recent Accounting Pronouncements</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Recent Accounting Pronouncements Adopted</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In February 2016, the Financial Accounting Standard Board (&#8220;FASB&#8221;) issued Accounting Standards Update (&#8220;ASU&#8221;) 2016-02, &#8220;Leases (ASC Topic 842)&#8221;, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, &#8220;Leases (ASC Topic 842): Targeted Improvements,&#8221; which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU&#160;2016-02.</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Recent Accounting Pronouncements Not Yet Adopted</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In June 2016, the FASB issued ASU 2016-13,&#160;&#8220;Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,&#8221; which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While we are currently assessing the impact the adoption of this ASU will have on our condensed consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test, that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In August 2018, the FASB issued ASU 2018-13, &#8220;Fair Value Measurement (Topic 820): Disclosure Framework &#8211; Changes to the Disclosure Requirements for Fair Value Measurement&#8221;, which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.&#160; This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In August 2018, the FASB issued ASU 2018-15, &#8220;Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer&#8217;s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,&#8221; which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.&#160; This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div></div></div> 3 1 0.0575 2000000 1926000 0 1727000 2000000 294000 147000 261000 2156000 -422000 -1804000 2134000 P4Y1M6D 1454000 0 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 1</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">General and Basis of Presentation</font></div><div style="text-align: left; text-indent: 18pt; margin-right: 8.85pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Telos Corporation, together with its subsidiaries (the &#8220;Company&#8221; or &#8220;Telos&#8221; or &#8220;We&#8221;), is an information technology solutions and services company addressing the needs of U.S. Government and commercial customers worldwide. Our principal offices are located at 19886 Ashburn Road, Ashburn, Virginia 20147. The Company was incorporated as a Maryland corporation in October 1971. Our website is <font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif;">www.telos.com</font>.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 8.85pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, and Teloworks, Inc., all of whose issued and outstanding share capital is owned by the Company. We have also consolidated the results of operations of Telos Identity Management Solutions, LLC (&#8220;Telos ID&#8221;) (see Note 2 &#8211; Non-controlling Interests). All intercompany transactions have been eliminated in consolidation.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 8.85pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (&#8220;GAAP&#8221;) and pursuant to rules and regulations of the Securities and Exchange Commission (&#8220;SEC&#8221;). The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons including, but not limited to, the impact of seasonal and short-term variations. We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2018 Annual Report on Form 10-K filed with the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;"> December 31, 2018.</font></div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 8.85pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that these condensed consolidated financial statements were issued.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Segment Reporting</div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker (&#8220;CODM&#8221;), or decision making group, in deciding how to allocate resources and assess performance. We currently operate in one operating and reportable business segment for financial reporting purposes.&#160; Our Chief Executive Officer is the CODM. The CODM only evaluates profitability based on consolidated results.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Recent Accounting Pronouncements</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Recent Accounting Pronouncements Adopted</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In February 2016, the Financial Accounting Standard Board (&#8220;FASB&#8221;) issued Accounting Standards Update (&#8220;ASU&#8221;) 2016-02, &#8220;Leases (ASC Topic 842)&#8221;, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, &#8220;Leases (ASC Topic 842): Targeted Improvements,&#8221; which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU&#160;2016-02.</div><div><br /></div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-style: italic;">Recent Accounting Pronouncements Not Yet Adopted</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In June 2016, the FASB issued ASU 2016-13,&#160;&#8220;Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,&#8221; which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While we are currently assessing the impact the adoption of this ASU will have on our condensed consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test, that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In August 2018, the FASB issued ASU 2018-13, &#8220;Fair Value Measurement (Topic 820): Disclosure Framework &#8211; Changes to the Disclosure Requirements for Fair Value Measurement&#8221;, which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.&#160; This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">In August 2018, the FASB issued ASU 2018-15, &#8220;Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer&#8217;s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,&#8221; which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.&#160; This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Revenue Recognition</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for revenue in accordance with Accounting Standard Codification (&#8220;ASC&#8221;) Topic 606, &#8220;Revenue from Contracts with Customers.&#8221; 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 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 to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. 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.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for a contract after it has been approved by the parties to the contract, the rights and the payment terms of the parties are identified, the contract has commercial substance and collectability is probable, which is presumed for our U.S. Government customers and prime contractors for which we perform as subcontractors to U.S. Government end-customers.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.&#160; 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&#8217;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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Revenue that is recognized at a point in time is for the sale of software licenses in our Cyber Operations and Defense (&#8220;CO&amp;D&#8221;) and IT &amp; Enterprise Solutions business groups and for the sale of resold products in Telos ID and CO&amp;D and is classified as product revenue.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price.&#160; 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.&#160; 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&#8217;s effect on progress toward completion of a performance obligation.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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 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 have 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.&#160; With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contract assets&#160;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 condensed consolidated balance sheet.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the condensed 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&#8217;s protection with respect to full and final performance under the contract.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contract liabilities&#160;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 condensed consolidated balance sheet on a net contract basis at the end of each reporting period.</div><div><br /></div></div><div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We have one reportable segment. <font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif; color: #000000;">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 international customers revenue is de minimus. The following tables disclose revenue (in thousands) by customer type and contract type for the periods presented.&#160; Prior period amounts have not been adjusted under the modified retrospective method.</font></div><div><br /></div><table cellpadding="0" cellspacing="0" style="font-family: 'Times New Roman', Times, serif; font-size: 10pt; text-align: left; color: #000000; width: 100%;"><tr><td valign="bottom" style="vertical-align: top; padding-bottom: 1px;">&#160;</td><td colspan="1" valign="bottom" style="vertical-align: bottom; padding-bottom: 1px;">&#160;</td><td colspan="6" valign="bottom" style="vertical-align: top; border-bottom: 1px solid rgb(0, 0, 0);"><div style="text-align: center; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Three Months Ended June 30,</div></td><td colspan="1" nowrap="nowrap" valign="bottom" style="text-align: left; vertical-align: bottom; padding-bottom: 1px;">&#160;</td><td colspan="1" valign="bottom" style="vertical-align: bottom; 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We expect to recognize approximately 85.4% of our remaining performance obligations as revenue in 2019, an additional 14.2% in 2020, and the balance thereafter.&#160; We recognized revenue of $1.2 million and $3.1 million during the three and six months ended June 30, 2019, respectively, and $1.5 million and $4.1 million during the three and six months ended June 30, 2018, respectively, that was included in the contract liabilities balance at the beginning of each fiscal year.</div><div><br /></div></div><div><div style="text-align: left; margin-right: 86.75pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Accounts Receivable</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon management&#8217;s knowledge of the specific circumstances related to overdue balances. The allowance for doubtful accounts is adjusted based on such evaluation. Accounts receivable balances are written off against the allowance when management deems the balances uncollectible.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sells certain accounts receivable to a third party, or the "Factor", without recourse to the Company. The Factor initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an accounts receivable until payment is received from the Factor. The balance of the sold receivables may not exceed&#160;$10 million. During the three and six months ended June 30, 2019, the Company sold approximately&#160;$4.4 million and $9.4 million of accounts receivable, respectively, and recognized a related loss of approximately&#160;$15,000 and $32,000 in selling, general and administrative expenses, respectively, for the same period. During the three and six months ended June 30, 2018, the Company sold approximately&#160;$2.0 million and $5.1 million of accounts receivable, respectively, and recognized a related loss of approximately&#160;$7,000 and $18,000 in selling, general and administrative expenses, respectively, for the same period. As of June 30, 2019, the balance of the sold accounts receivable was approximately $1.4 million, and the related deferred price was approximately $0.2 million. As of&#160;June 30, 2018, the balance of the sold accounts receivable was approximately $1.0 million, and the related deferred price was approximately $0.1 million. As of&#160;December 31, 2018, the balance of the sold accounts receivable was approximately $0.9 million, and the related deferred price was approximately&#160;$0.1 million.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;"><font style="background-color: #FFFFFF;">Inventories </font></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average method. Substantially all inventories consist of purchased commercial off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. An allowance for obsolete, slow-moving or nonsalable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future. Gross inventory was <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">$5.4 million</font> and <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">$4.9 million</font> as of June 30, 2019 and December 31, 2018<font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">, respectively. As of June 30, 2019, it is management&#8217;s judgment that we have fully provided for any potential inventory obsolescence, </font>which was $0.5 million as of June 30, 2019 and December 31, 2018.</div><div><br /></div></div><div><div style="text-align: left; margin-right: 86.75pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Software Development Costs</div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, &#8220;Software &#8211; Costs of Software to be Sold, Leased, or Marketed.&#8221;<font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif;">&#160;</font>Software development costs for software to be sold, leased or otherwise marketed 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. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified.&#160; 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 June 30, 2019 and December 31, 2018, we capitalized $4.4 million and $3.1 million of software development costs, respectively, which are included as a part of property and equipment. Amortization expense was $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. Accumulated amortization was $2.2 million and $1.3 million as of June 30, 2019 and December 31, 2018, 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.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Income Taxes</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for income taxes in accordance with ASC 740, &#8220;Income Taxes.&#8221;&#160; Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.&#160; 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.&#160; 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.&#160; 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.&#160; 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.&#160; 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 June 30, 2019 and December 31, 2018.&#160;As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Goodwill</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, &#8220;Intangibles - Goodwill and Other,&#8221; which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31 each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, CO&amp;D, Identity Management, and IT and Enterprise Solutions, of which goodwill is housed in the CO&amp;D reporting unit, in comparison to the reporting unit&#8217;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 estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company&#8217;s assessment resulted in a fair value that was greater than the Company&#8217;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&#160; December 31, 2018. There were no triggering events which would require goodwill impairment consideration during the quarter. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value of our reporting unit 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 charge in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Stock-Based Compensation</div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Compensation cost is recognized based on the requirements of ASC 718, &#8220;Stock Compensation,&#8221; for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. To date, there have been no grants in 2019. Such stock is subject to a vesting schedule as follows:&#160; 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 June 30, 2019, there were 1,213,750 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 our common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.&#160; Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the condensed consolidated financial statements.</div><div><br /></div></div><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Other Comprehensive Income</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Our functional currency is the U.S. Dollar. 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vertical-align: bottom; width: 1%; padding-bottom: 3px; background-color: #CCEEFF;">&#160;</td></tr></table><div><br /></div></div></div> 0 -5000 2000 -7000 -381000 0 962000 915000 2128000 1985000 0 0 0 0 0 5000 5000 0 -2000 -2000 0 0 0 7000 0 0 0 7000 689000 838000 1895000 2798000 244000 491000 3000 188000 193000 7000 989000 2410000 1287000 836000 905000 984000 10 0.60 1.20 736863 0.12 0.12 0.060 0.01 2100000 6000000 2858723 2500000 2500000 444000 -1994000 -1308000 -4934000 531000 0 0 0 0 0 -1741000 -253000 0 -87000 0 0 0 -5154000 220000 0 0 0 -2073000 765000 P2Y 19074000 17426000 245000 34542000 27617000 41400000 135400000 137300000 74100000 76000 105000 234000 286000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Note 9</font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">.&#160; </font><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif; font-weight: bold;">Related Party Transactions</font></div><div style="text-align: left; text-indent: 18pt; margin-right: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">Emmett J. Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996. </font>The amounts paid to this individual as compensation were $76,000 and $234,000 for the three and six months ended June 30, 2019, respectively, and $105,000 and $286,000 for the three and six months ended June 30, 2018, respectively.<font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;"> Additionally, </font>as of June 30, 2019 and December 31, 2018, <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">Mr. Wood owned 810,000 shares </font>of the Company&#8217;s Class A Common Stock <font style="background-color: #FFFFFF; font-size: 10pt; font-family: 'Times New Roman', Times, serif;">and 50,000 shares of the Company&#8217;s Class B Common Stock.</font></div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 1.45pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">On March 31, 2015, the Company entered into the Porter Notes.&#160;Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock.&#160;Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015.&#160;The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017.&#160;</div><div><br /></div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif; color: #000000;">On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extends the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, </font>and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes.</div><div><br /></div></div></div> 541000 490000 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; margin-right: 86.75pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Software Development Costs</div><div style="text-align: left; text-indent: 18pt; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, &#8220;Software &#8211; Costs of Software to be Sold, Leased, or Marketed.&#8221;<font style="font-size: 10pt; font-family: 'Times New Roman', Times, serif;">&#160;</font>Software development costs for software to be sold, leased or otherwise marketed 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. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified.&#160; 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 June 30, 2019 and December 31, 2018, we capitalized $4.4 million and $3.1 million of software development costs, respectively, which are included as a part of property and equipment. Amortization expense was $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. Accumulated amortization was $2.2 million and $1.3 million as of June 30, 2019 and December 31, 2018, 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.</div><div><br /></div></div></div> -144283000 -139129000 36048000 4058000 34377000 34943000 30885000 1671000 4800000 67214000 7672000 67344000 62414000 59672000 2681000 28857000 33774000 32858000 28173000 3500000 4089000 2274000 3691000 2085000 62569000 62757000 4457000 4775000 7620000 7856000 53787000 6394000 5807000 53094000 74100000 0.142 0.854 <div style="font-family: 'Times New Roman', Times, serif; font-size: 10pt;"><div><div style="text-align: left; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt; font-weight: bold;">Revenue Recognition</div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for revenue in accordance with Accounting Standard Codification (&#8220;ASC&#8221;) Topic 606, &#8220;Revenue from Contracts with Customers.&#8221; 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 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 to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. 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.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">We account for a contract after it has been approved by the parties to the contract, the rights and the payment terms of the parties are identified, the contract has commercial substance and collectability is probable, which is presumed for our U.S. Government customers and prime contractors for which we perform as subcontractors to U.S. Government end-customers.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.&#160; 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&#8217;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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Revenue that is recognized at a point in time is for the sale of software licenses in our Cyber Operations and Defense (&#8220;CO&amp;D&#8221;) and IT &amp; Enterprise Solutions business groups and for the sale of resold products in Telos ID and CO&amp;D and is classified as product revenue.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contracts are routinely and often modified to account for changes in contract requirements, specifications, quantities, or price.&#160; 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.&#160; 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&#8217;s effect on progress toward completion of a performance obligation.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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 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 have 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.&#160; With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.&#160; 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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">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.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contract assets&#160;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 condensed consolidated balance sheet.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the condensed 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&#8217;s protection with respect to full and final performance under the contract.</div><div><br /></div><div style="text-align: left; text-indent: 18pt; margin-right: 4.5pt; color: #000000; font-family: 'Times New Roman', Times, serif; font-size: 10pt;">Contract liabilities&#160;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. 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We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006. The Public Preferred Stock was fully accreted as of December 2008. We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. 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Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. 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net Public preferred stock Redeemable Noncontrolling Interest, Equity, Fair Value Senior Redeemable Preferred Stock [Member] Related Party Transactions [Abstract] Related Party Transaction [Line Items] Compensation to related parties Related Party [Domain] Related Party [Axis] Related Party Transactions, by Related Party [Axis] Related Party Transactions Related Party Transactions Disclosure [Text Block] Repayments of term loan Repayments of Bank Debt Repayments of senior credit facilities Repayments of Lines of Credit Payments under finance lease obligations Repayments of Long-term Capital Lease Obligations Software Development Costs Restricted Stock Grants [Member] Accumulated deficit Retained Earnings (Accumulated Deficit) Accumulated Deficit [Member] Revenue Revenue from Contract with Customer, Excluding Assessed Tax Revenue from Contract with Customer [Abstract] Remaining performance obligation Remaining performance obligation percentage Revenue, Remaining Performance Obligation, Percentage Revenue Recognition Remaining performance obligation, expected timing of satisfaction, period Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Table] Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis] Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items] Revenue, Performance Obligation [Abstract] Revenue Revolving Credit [Member] Revolving Credit Facility [Member] Percentage of ownership interest owned after transaction Percentage of membership interest owned before Accumulated Other Comprehensive Income Carrying Amount of the Credit Agreement Schedule of Related Party Transactions, by Related Party [Table] Schedule of Share-based Compensation Arrangements by Share-based Payment Award [Table] Segment Reporting Segment Reporting [Abstract] Selling, general and administrative expenses Senior term loan, net of unamortized discount and issuance costs (Note 5) Senior term loan, net Senior Notes, Noncurrent Service [Member] Restricted stock issued during the period (in shares) Share-based Compensation Arrangement by Share-based Payment Award [Line Items] Restricted stock remained subject to vesting (in shares) Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number Stock-Based Compensation Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block] Equity Award [Domain] CONDENSED CONSOLIDATED BALANCE SHEETS [Abstract] Class of Stock [Axis] Statement [Line Items] Statement [Table] CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) [Abstract] Statement, Equity Components [Axis] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT [Abstract] Total stockholders' deficit Beginning balance Ending balance Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest Stockholders' deficit Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest [Abstract] Total Telos stockholders' deficit Stockholders' Equity Attributable to Parent Telos stockholders' deficit Stockholders' Equity Attributable to Parent [Abstract] Subordinated debt (Note 5) Subordinated debt - short-term (Note 6) Subordinated Debt [Abstract] Subsequent Event Type [Domain] Subsequent Events [Abstract] Subsequent Event Type [Axis] Subsequent Events [Member] Subsequent Event [Member] Supplemental disclosures of cash flow information: Redeemable Preferred Stock [Abstract] Public preferred stock par value (in dollar per share) Class of Stock [Table] Time-and-Materials [Member] Title of Individual with Relationship to Entity [Domain] Relationship to Entity [Domain] Deferred Compensation Arrangement with Individual, Share-based Payments, by Title of Individual [Axis] Title of Individual [Axis] Accounts Receivable Type of Adoption [Domain] Interest and penalties Unrecognized tax benefits Variable Rate [Axis] Variable Rate [Domain] Litigation Case [Axis] Litigation Case [Domain] Customer [Axis] Maximum [Member] Minimum [Member] Customer [Domain] Ownership [Domain] Ownership [Axis] Product and Service [Domain] Product and Service [Axis] Range [Domain] Range [Axis] Loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loan [Member] Term Loan [Member] A person serving as an employee since 1996 and relative (brother) of Chairman and CEO. Emmett Wood [Member] Emmett J. Wood [Member] Any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has shares of the entity with 1) voting power which includes the power to vote, or to direct the voting of, such security, and/or 2) investment power which includes the power to dispose, or to direct the disposition of, such security. Enlightenment Capital Solutions Fund II LP [Member] Enlightenment Capital Solutions Fund, II L.P. [Member] Enlightenment Capital Credit Agreement [Abstract] Enlightenment Capital Credit Agreement [Abstract] The cash inflow associated with the proceeds on the Loan as a prepayment of all interest due and payable at the accrual rate during the period. Proceeds From Loan Prepayment Proceeds from loan prepayment Refers to the debt instrument increase in interest rate in event of default under the debt agreement. Debt Instrument Increase In Interest Rate Increase in interest rate In Event Of Default Increase in interest rate in event of default Refers to the debt instrument monthly accrued interest rate under the debt agreement. Debt Instrument Monthly Accrued Interest Rate Monthly accrued interest rate Refers to debt instrument monthly accrued interest rate during continuance of alternate interest rate event. Debt Instrument Monthly Accrued Interest Rate During Continuance Of Alternate Interest Rate Event Monthly accrued interest rate during continuance of an Alternate Interest Rate Event Refers to number of days prior written notice the organization may prepay any portion or the entire amount of the Loan, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days. 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Legal Proceedings [Table] Refers to the plaintiff in the case against the Company. Wynnefield [Member] Refers to the plaintiff in the case against the Company. Costa Brava [Member] Line items represent financial concepts included in a table. These concepts are used to disclose reportable information associated with domain members defined in one or many axes to the table. Legal Proceedings [Line Items] Legal Proceedings [Line Items] Percentage of public preferred stock held Public preferred stock ownership percentage Percentage of public preferred stock owned Number of filed counts against counter defendants. Number of filed counterclaim counts Number of filed counterclaim counts Number of filed counts against counter defendants related to interference with the Company's contracts or business relationships. Number of counts related to interference with the Company's contracts or business relationships Number of filed counts against counter defendants seeking declaratory relief on counter defendants' claim of entitlement to indemnification. Number of counts seeking declaratory relief Number of counts seeking declaratory relief Refers to the plaintiff in the case against the Company. Hamot [Member] Prepayment price percentage of the principal amount for the period. Prepayment Price Percentage One Prepayment price percentage for January 26, 2019 to January 25, 2020 Prepayment price percentage of the principal amount for the specific period. Prepayment Price Percentage Two Prepayment price percentage for January 26, 2020 to October 14, 2020 Amount of the fee paid to agent for borrowing money under the debt instrument. Debt Instrument, Agent Fee Amount Agent fee This tabular disclosure represents changes in non-controlling interest. Changes in non controlling interest [Table Text Block] Changes in Non-Controlling Interest Percentage of the outstanding voting securities transferred upon a change in control. Percentage of outstanding voting securities Percentage of ownership interests which are transferred to persons or individuals without the consent of Telos ID. Percentage of ownership interests Class B Membership Unit. Class B Membership Unit [Member] Class A membership unit. Class A Membership Unit [Member] Class A Membership Unit [Member] Sum of the carrying amounts of net book value of assets on particular date. Net Book Value Of Assets Contributed Net book value of assets contributed Refers to cash consideration received on sale of membership interest. Cash Consideration Received On Sale Of Membership Interest Cash consideration received on sale of membership interest Percentage of profit and loss allocated. Percentage of profit and loss allocated Percentage of profit and loss allocated Classes of membership units. Number of classes of membership units Total number of members in board of director team. Number of members in board of director Number of members in board of director Another company which is controlled, directly or indirectly, by its parent. The usual condition for control is ownership of a majority (over 50%) of the outstanding voting stock. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders or by court decree. Telos ID [Member] Telos ID [Member] Total number of directors entitled to appoint during the reporting period. Number Of Directors Entitled To Appoint Number of directors entitled to appoint Total percentage of membership interest sold to investor. Percentage Of Membership Interest Sold To Investor Percentage of membership interest sold to investor Net Book Value Of Assets [Abstract] Net book value of assets [Abstract] Redeemable preferred stock classified as a noncurrent liability rather than temporary equity. Senior redeemable preferred stock Senior redeemable preferred stock (Note 6) Preferred stock classified as a noncurrent liability rather than as equity. Public preferred stock Public preferred stock (Note 6) Redeemable preferred stock classified as a current liability rather than temporary equity. Senior redeemable preferred stock - short-term (Note 7) Senior redeemable preferred stock - short-term (Note 6) Restricted Stock Grants [Abstract] Maximum percentage of restricted stock vested on date of grant. Percentage restricted stock vested on date of grant Restricted stock vested on date of grant Executive officers are ranking officers of the entity who have been appointed to the position by the board of directors. 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Debt issuance costs and prepayment of interest on senior term loan The entire disclosure for redeemable preferred stock describing the type of equity share that is liable to be bought back by the issuing company on a specified date or after a specified period of notice. Corporate legislation in some jurisdictions prohibits the redemption if it jeopardizes the financial health of the issuer the type of equity share that is liable to be bought back by the issuing company on a specified date or after a specified period of notice. Corporate legislation in some jurisdictions prohibits the redemption if it jeopardizes the financial health of the issuer. Redeemable Preferred Stock [Text Block] Redeemable Preferred Stock Description of type or class of redeemable preferred stock. For instance, cumulative preferred stock, noncumulative preferred stock, convertible or series. Twelve Percent Cumulative Exchangeable Redeemable Preferred Stock [Member] Public Preferred Stock [Member] The number of securities classified as long term liabilities that have been sold (or granted) to the entity's shareholders. Preferred Stock Liability Shares Issued And Outstanding Preferred stock issued and outstanding (in shares) Senior Redeemable Preferred Stock [Abstract] Percentage of redeemable preferred stock held by related party after redemption. Percentage Of Redeemable Preferred Stock Held By Related Party After Redemption Percentage of redeemable preferred stock held by related party after redemption Percentage of shares owned Refers to per share liquidation preference (or restrictions) of redeemable preferred stock that has a preference in involuntary liquidation considerably in excess of the par or stated value of the shares. The liquidation preference is the difference between the preference in liquidation and the par or stated values of the share. 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Financing and Security Agreement [Member] Refers to an agreement to purchase accounts receivables. Accounts Receivable Purchase Agreement [Member] Refers to percentage of discount factor for federal government prime contracts. Percentage of Discount Factor for Federal Government Prime Contracts Percentage of discount factor for federal government prime contracts Refers to total amount of purchased receivables subject to a limit of outstanding purchased receivables. Purchased Receivables Limit of outstanding purchased receivables Refers to percentage of initial purchase price of purchased receivable on the face value of receivable. Percentage of Initial Purchase Price of Purchased Receivable Percentage of initial purchase price of purchased receivable Refers to percentage of monthly fee. Percentage of Monthly Fee Percentage of monthly fee Refers to term of financing agreement, in PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days. Term of Financing Agreement Financing agreement term Refers to percentage of discount factor for non-federal government non-investment grade account obligors. Percentage of Discount Factor for Non Federal Government Non Investment Grade Account Obligors Percentage of discount factor for non-federal government non-investment grade account obligors Refers to outstanding principal amount of advances under financing agreement. Outstanding Principal Amount of Advances Maximum outstanding principal amount of advances Refers to percentage of advances of the net amount of certain acceptable customer accounts. Percentage of Advances Percentage of advances Refers to percentage of program access fee of the daily ending account balance for each day that purchased receivable are outstanding. Percentage of Program Access Fee Percentage of program access fee Refers to percentage of discount factor for non-federal government investment grade account obligors. Percentage of Discount Factor for Non Federal Government Investment Grade Account Obligors Percentage of discount factor for non-federal government investment grade account obligors Refers to percentage of commitment fee per annum of maximum amount minus the amount of purchased receivables outstanding. Percentage of Commitment Fee Percentage of commitment fee Refers to cash inflow from purchase agreement during the period. Proceeds from Purchase Agreement Proceeds from purchase agreement Refers to initial enrollment fee for purchase agreement. Initial Enrollment Fee Initial enrollment fee Accounts Receivable Purchase Agreement [Abstract] Accounts Receivable Purchase Agreement [Abstract] Refers to residual percentage of purchased receivable. Residual Percentage of Purchased Receivable Residual percentage of purchased receivable Refers to automatic renewal term if agreement not terminated in writing, in PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days. Automatic Renewal Term Automatic renewal term Financing and Security Agreement [Abstract] Name of the entity involved in financing and security agreement. Action Capital Corporation [Member] Name of the entity involved in accounts receivable purchase agreement. Republic Capital Access LLC [Member] Tabular disclosure of supplemental cash flow information related to leases. Supplemental Cash Flow Information Related to Leases [Table Text Block] Supplemental Cash Flow Information Related to Leases Weighted Average Remaining Lease Term [Abstract] Weighted Average Discount Rate [Abstract] Amount of lease cost on finance lease liability. Finance Lease Cost Total finance lease cost Supplemental Cash Flow Information Related To Leases [Abstract] Cash Paid For Amounts Included In The Measurement Of Lease Liabilities [Abstract] Cash paid for amounts included in the measurement of lease liabilities: [Abstract] Right-Of-Use Assets Obtained In Exchange For Lease Obligations [Abstract] Right-of-use assets obtained in exchange for lease obligations: [Abstract] EX-101.PRE 10 tlsrp-20190630_pre.xml XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE XML 11 R1.htm IDEA: XBRL DOCUMENT v3.19.2
Document and Entity Information - shares
 6 Months Ended
Jun. 30, 2019
Aug. 07, 2019
Entity Information [Line Items]    
Entity Registrant Name TELOS CORP  
Entity Central Index Key 0000320121  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Entity Filer Category Non-accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Address, State or Province MD  
Class A Common Stock [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   45,158,460
Class B Common Stock [Member]    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   4,037,628
XML 12 R2.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Revenue        
Revenue $ 36,048 $ 34,943 $ 67,214 $ 67,344
Costs and expenses        
Total costs and expenses 26,033 22,865 48,223 45,034
Selling, general and administrative expenses 10,437 9,922 20,795 20,176
Operating (loss) income (422) 2,156 (1,804) 2,134
Other income (expense)        
Other income 188 3 193 7
Interest expense (1,740) (1,709) (3,500) (3,384)
(Loss) income before income taxes (1,974) 450 (5,111) (1,243)
(Provision) benefit for income taxes (Note 7) (20) (6) 177 (65)
Net (loss) income (1,994) 444 (4,934) (1,308)
Less: Net loss (income) attributable to non-controlling interest (Note 2) 253 (531) (220) (765)
Net loss attributable to Telos Corporation (1,741) (87) (5,154) (2,073)
Service [Member]        
Revenue        
Revenue 34,377 30,885 62,414 59,672
Costs and expenses        
Total costs and expenses 25,203 21,453 45,394 41,976
Product [Member]        
Revenue        
Revenue 1,671 4,058 4,800 7,672
Costs and expenses        
Total costs and expenses $ 830 $ 1,412 $ 2,829 $ 3,058
XML 13 R3.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [Abstract]        
Net (loss) income $ (1,994) $ 444 $ (4,934) $ (1,308)
Other comprehensive (loss) income, net of tax:        
Foreign currency translation adjustments 0 (5) 2 (7)
Less: Comprehensive loss (income) attributable to non-controlling interest 253 (531) (220) (765)
Comprehensive loss attributable to Telos Corporation $ (1,741) $ (92) $ (5,152) $ (2,080)
XML 14 R4.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 776 $ 72
Accounts receivable, net of reserve of $306 (Note 1) 27,617 34,542
Inventories, net of obsolescence reserve of $520 (Note 1) 4,867 4,389
Deferred program expenses 491 244
Other current assets 2,128 1,985
Total current assets 35,879 41,232
Property and equipment, net of accumulated depreciation of $30,621 and $28,665, respectively 19,074 17,426
Operating lease right-of-use assets (Note 10) 1,727 0
Goodwill (Note 3) 14,916 14,916
Other assets 962 915
Total assets 72,558 74,489
Current liabilities    
Accounts payable and other accrued payables (Note 5) 22,113 21,779
Accrued compensation and benefits 9,965 9,082
Contract liabilities (Note 1 and 5) 4,363 5,232
Finance lease obligations - short-term (Note 10) 1,168 1,115
Other current liabilities (Note 10) 2,798 1,895
Total current liabilities 40,407 39,103
Senior term loan, net of unamortized discount and issuance costs (Note 5) 11,095 10,984
Subordinated debt (Note 5) 2,759 2,597
Finance lease obligations - long-term (Note 10) 16,271 16,865
Operating lease liabilities - long-term (Note 10) 1,454 0
Deferred income taxes (Note 7) 603 818
Public preferred stock (Note 6) 137,299 135,387
Other liabilities (Note 7) 689 838
Total liabilities 210,577 206,592
Commitments and contingencies (Note 8)
Telos stockholders' deficit    
Common stock 78 78
Additional paid-in capital 4,310 4,310
Accumulated other comprehensive income 19 17
Accumulated deficit (144,283) (139,129)
Total Telos stockholders' deficit (139,876) (134,724)
Non-controlling interest in subsidiary (Note 2) 1,857 2,621
Total stockholders' deficit (138,019) (132,103)
Total liabilities, redeemable preferred stock, and stockholders' deficit $ 72,558 $ 74,489
XML 15 R5.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Current assets    
Accounts receivable, reserve $ 306 $ 306
Inventories, obsolescence reserve 520 520
Property and equipment, accumulated depreciation $ 30,621 $ 28,665
XML 16 R6.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Operating activities:    
Net loss $ (4,934) $ (1,308)
Adjustments to reconcile net loss to cash provided by operating activities:    
Dividends of preferred stock as interest expense 1,912 1,911
Depreciation and amortization 2,341 1,369
Amortization of debt issuance costs 111 95
Deferred income tax (benefit) provision (215) 25
Other noncash items 0 381
Changes in other operating assets and liabilities 6,711 1,027
Cash provided by operating activities 5,926 3,500
Investing activities:    
Capitalized software development costs (1,287) (836)
Purchases of property and equipment (2,410) (989)
Cash used in investing activities (3,697) (1,825)
Financing activities:    
Payments under finance lease obligations (541) (490)
Distributions to Telos ID Class B member - non-controlling interest (984) (905)
Cash used in financing activities (1,525) (1,395)
Increase in cash and cash equivalents 704 280
Cash and cash equivalents, beginning of period 72 600
Cash and cash equivalents, end of period 776 880
Cash paid during the period for:    
Interest 1,428 1,227
Income taxes 39 19
Noncash:    
Dividends of preferred stock as interest expense $ 1,912 $ 1,911
XML 17 R7.htm IDEA: XBRL DOCUMENT v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) - USD ($)
$ in Thousands
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Other Comprehensive Income [Member]
Accumulated Deficit [Member]
Noncontrolling Interest [Member]
Total
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Cumulative effect adjustment due to change in accounting policy $ 0 $ 0 $ 0 $ 3,881 $ 0 $ 3,881
Beginning balance at Dec. 31, 2017 78 4,310 32 (141,370) 913 (136,037)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) income 0 0 0 (2,073) 765 (1,308)
Foreign currency translation gain (loss) 0 0 (7) 0 0 (7)
Distributions 0 0 0 0 (905) (905)
Ending balance at Jun. 30, 2018 78 4,310 25 (139,562) 773 (134,376)
Beginning balance at Mar. 31, 2018 78 4,310 30 (139,475) 1,147 (133,910)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) income 0 0 0 (87) 531 444
Foreign currency translation gain (loss) 0 0 (5) 0 0 (5)
Distributions 0 0 0 0 (905) (905)
Ending balance at Jun. 30, 2018 78 4,310 25 (139,562) 773 (134,376)
Beginning balance at Dec. 31, 2018 78 4,310 17 (139,129) 2,621 (132,103)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) income 0 0 0 (5,154) 220 (4,934)
Foreign currency translation gain (loss) 0 0 2 0 0 2
Distributions 0 0 0 0 (984) (984)
Ending balance at Jun. 30, 2019 78 4,310 19 (144,283) 1,857 (138,019)
Beginning balance at Mar. 31, 2019 78 4,310 19 (142,542) 2,378 (135,757)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net (loss) income 0 0 0 (1,741) (253) (1,994)
Distributions 0 0 0 0 (268) (268)
Ending balance at Jun. 30, 2019 $ 78 $ 4,310 $ 19 $ (144,283) $ 1,857 $ (138,019)
XML 18 R8.htm IDEA: XBRL DOCUMENT v3.19.2
General and Basis of Presentation
 6 Months Ended
Jun. 30, 2019
General and Basis of Presentation [Abstract]  
General and Basis of Presentation
Note 1.  General and Basis of Presentation
Telos Corporation, together with its subsidiaries (the “Company” or “Telos” or “We”), is an information technology solutions and services company addressing the needs of U.S. Government and commercial customers worldwide. Our principal offices are located at 19886 Ashburn Road, Ashburn, Virginia 20147. The Company was incorporated as a Maryland corporation in October 1971. Our website is www.telos.com.

The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, and Teloworks, Inc., all of whose issued and outstanding share capital is owned by the Company. We have also consolidated the results of operations of Telos Identity Management Solutions, LLC (“Telos ID”) (see Note 2 – Non-controlling Interests). All intercompany transactions have been eliminated in consolidation.

In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons including, but not limited to, the impact of seasonal and short-term variations. We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2018 Annual Report on Form 10-K filed with the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that these condensed consolidated financial statements were issued.

Segment Reporting
Operating segments are defined as components of an enterprise for which separate 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 currently operate in one operating and reportable business segment for financial reporting purposes.  Our Chief Executive Officer is the CODM. The CODM only evaluates profitability based on consolidated results.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (ASC Topic 842)”, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC Topic 842): Targeted Improvements,” which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU 2016-02.

Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While we are currently assessing the impact the adoption of this ASU will have on our condensed consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test, that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

Revenue Recognition
We account for revenue in accordance with Accounting Standard 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 good 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 to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. 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 to each performance obligation based on our best estimate of standalone selling price.

We account for a contract after it has been approved by the parties to the contract, the rights and the payment terms of the parties are identified, the contract has commercial substance and collectability is probable, which is presumed for our U.S. Government customers and prime contractors for which we perform as subcontractors to U.S. Government end-customers.

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 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, 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 Cyber Operations and Defense (“CO&D”) and IT & Enterprise Solutions business groups and for the sale of resold products in Telos ID and CO&D 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 DCAA audits of incurred cost submissions. This resulted in signed final rate agreement letters for 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 have 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 of our contracts do not include award or incentive fees. For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee.  With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.  We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in 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.

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 condensed consolidated balance sheet.

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the condensed 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 condensed consolidated balance sheet 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 international customers revenue 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.

  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Federal
 
$
33,774
  
$
32,858
  
$
62,757
  
$
62,569
 
State & Local, and Commercial
  
2,274
   
2,085
   
4,457
   
4,775
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 


  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Firm fixed-price
 
$
28,857
  
$
28,173
  
$
53,787
  
$
53,094
 
Time-and-materials
  
3,691
   
4,089
   
7,620
   
7,856
 
Cost plus fixed fee
  
3,500
   
2,681
   
5,807
   
6,394
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 

The following table discloses accounts receivable (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Billed accounts receivable
 
$
10,677
  
$
18,848
 
Unbilled receivables
  
17,246
   
16,000
 
Allowance for doubtful accounts
  
(306
)
  
(306
)
Receivables – net
 
$
27,617
  
$
34,542
 

The following table discloses contract liabilities (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Contract liabilities
 
$
4,363
  
$
5,232
 

As of June 30, 2019, we had $74.1 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 85.4% of our remaining performance obligations as revenue in 2019, an additional 14.2% in 2020, and the balance thereafter.  We recognized revenue of $1.2 million and $3.1 million during the three and six months ended June 30, 2019, respectively, and $1.5 million and $4.1 million during the three and six months ended June 30, 2018, respectively, that was included in the contract liabilities balance at the beginning of each fiscal year.

Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon management’s knowledge of the specific circumstances related to overdue balances. The allowance for doubtful accounts is adjusted based on such evaluation. Accounts receivable balances are written off against the allowance when management deems the balances uncollectible.

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sells certain accounts receivable to a third party, or the "Factor", without recourse to the Company. The Factor initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an accounts receivable until payment is received from the Factor. The balance of the sold receivables may not exceed $10 million. During the three and six months ended June 30, 2019, the Company sold approximately $4.4 million and $9.4 million of accounts receivable, respectively, and recognized a related loss of approximately $15,000 and $32,000 in selling, general and administrative expenses, respectively, for the same period. During the three and six months ended June 30, 2018, the Company sold approximately $2.0 million and $5.1 million of accounts receivable, respectively, and recognized a related loss of approximately $7,000 and $18,000 in selling, general and administrative expenses, respectively, for the same period. As of June 30, 2019, the balance of the sold accounts receivable was approximately $1.4 million, and the related deferred price was approximately $0.2 million. As of June 30, 2018, the balance of the sold accounts receivable was approximately $1.0 million, and the related deferred price was approximately $0.1 million. As of December 31, 2018, the balance of the sold accounts receivable was approximately $0.9 million, and the related deferred price was approximately $0.1 million.

Inventories
Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average method. Substantially all inventories consist of purchased commercial off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. An allowance for obsolete, slow-moving or nonsalable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future. Gross inventory was $5.4 million and $4.9 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $0.5 million as of June 30, 2019 and December 31, 2018.

Software Development Costs
Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed.” Software development costs for software to be sold, leased or otherwise marketed 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. 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 June 30, 2019 and December 31, 2018, we capitalized $4.4 million and $3.1 million of software development costs, respectively, which are included as a part of property and equipment. Amortization expense was $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. Accumulated amortization was $2.2 million and $1.3 million as of June 30, 2019 and December 31, 2018, 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.

Income Taxes
We account for income taxes in accordance with ASC 740, “Income Taxes.”  Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.  We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of June 30, 2019 and December 31, 2018. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.

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.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.

Goodwill
We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31 each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, CO&D, Identity Management, and IT and Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit’s net asset carrying values. Our discounted cash flows required management'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 estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required to be performed and no impairment of goodwill was recorded as of  December 31, 2018. There were no triggering events which would require goodwill impairment consideration during the quarter. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value of our reporting unit 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 charge in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.

Stock-Based Compensation
Compensation cost is recognized based on the requirements of ASC 718, “Stock Compensation,” for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. To date, there have been no grants in 2019. 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 June 30, 2019, there were 1,213,750 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 our common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.  Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the condensed consolidated financial statements.

Other Comprehensive Income
Our functional currency is the U.S. Dollar. For one of our wholly owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Translation gains and losses are included in stockholders’ deficit as a component of accumulated other comprehensive income.

Accumulated other comprehensive income included within stockholders’ deficit consists of the following (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Cumulative foreign currency translation loss
 
$
(88
)
 
$
(90
)
Cumulative actuarial gain on pension liability adjustment
  
107
   
107
 
Accumulated other comprehensive income
 
$
19
  
$
17
 
XML 19 R9.htm IDEA: XBRL DOCUMENT v3.19.2
Non-controlling Interests
 6 Months Ended
Jun. 30, 2019
Non-controlling Interests [Abstract]  
Non-controlling Interests
Note 2.  Non-controlling Interests
On April 11, 2007, Telos ID was formed as a limited liability company under the Delaware Limited Liability Company Act. We contributed substantially all of the assets of our Identity Management business line and assigned our rights to perform under our U.S. Government contract with the Defense Manpower Data Center (“DMDC”) to Telos ID at their stated book values. The net book value of assets we contributed totaled $17,000. Until April 19, 2007, we owned 99.999% of the membership interests of Telos ID and certain private equity investors (“Investors”) owned 0.001% of the membership interests of Telos ID. On April 20, 2007, we sold an additional 39.999% of the membership interests to the Investor in exchange for $6 million in cash consideration. In accordance with ASC 505, “Equity,” we recognized a gain of $5.8 million. As a result, we owned 60% of Telos ID, and therefore continued to account for the investment in Telos ID using the consolidation method.

On December 24, 2014 (the “Closing Date”), we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) between the Company and the Investors, pursuant to which the Investors acquired from the Company an additional ten percent (10%) membership interest in Telos ID in exchange for $5 million (the “Transaction”). In connection with the Transaction, the Company and the Investors entered into the Second Amended and Restated Operating Agreement (the “Operating Agreement”) governing the business, allocation of profits and losses and management of Telos ID. Under the Operating Agreement, Telos ID is managed by a board of directors comprised of five (5) members (the “Telos ID Board”). The Operating Agreement provides for two classes of membership units, Class A (owned by the Company) and Class B (owned by the Investors). The Class A member (the Company) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint three (3) members of the Telos ID Board. The Class B member (the Investors) owns 50% of Telos ID, is entitled to receive 50% of the profits of Telos ID, and may appoint two (2) members of the Telos ID Board.

Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID board of director seats.

Under the Operating Agreement, the Class A and Class B members each have certain options with regard to the ownership interests held by the other party including the following:

●
Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a “Change in Control”), the Class A member has the option to purchase the entire membership interest of the Class B member.
●
Upon the occurrence of the following events: (i) the involuntary termination of John B. Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.
●
In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.
●
The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such violation.

If either the Class A member or the Class B member elects to sell its interest or buy the other member’s interest upon the occurrence of any of the foregoing events, the purchase price for the interest will be based on an appraisal of Telos ID prepared by a nationally recognized investment banker. If the Class A member fails to satisfy its obligation, subject to the restrictions in the Purchase Agreement, to purchase the interest of the Class B member under the Operating Agreement, the Class B member may require Telos ID to initiate a sales process for the purpose of seeking an offer from a third party to purchase Telos ID that maximizes the value of Telos ID. The Telos ID Board must accept any offer from a bona fide third party to purchase Telos ID if that offer is approved by the Class B member, unless the purchase of Telos ID would violate the terms of any existing line of credit available to the Company and the applicable lender does not consent to that purchase or waive the violation. The sale process is the sole remedy available to the Class B member if the Class A member does not purchase its membership interest.  Under such a forced sale scenario, a sales process would result in both members receiving their proportionate membership interest share of the sales proceeds and both members would always be entitled to receive the same form of consideration.

Pursuant to the Transaction, the Class A and Class B members each own 50% of Telos ID, as mentioned above, and as such each was allocated 50% of the profits (loss), which was $(0.3) million and $0.2 million for the three and six months ended June 30, 2019, respectively, and $0.5 million and $0.8 million for the three and six months ended June 30, 2018, respectively. The Class B member is the non-controlling interest.

Distributions are made to the members only when and to the extent determined by Telos ID’s Board of Directors, in accordance with the Operating Agreement. The Class B member received a total distribution of $0.3 million and $1.0 million for the three and six months ended June 30, 2019, respectively, and $0.9 million for the three and six months ended June 30, 2018.

The following table details the changes in non-controlling interest for the three and six months ended June 30, 2019 and 2018 (in thousands):

  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Non-controlling interest, beginning of period
 
$
2,378
  
$
1,147
  
$
2,621
  
$
913
 
Net (loss) income
  
(253
)
  
531
   
220
   
765
 
Distributions
  
(268
)
  
(905
)
  
(984
)
  
(905
)
Non-controlling interest, end of period
 
$
1,857
  
$
773
  
$
1,857
  
$
773
 
XML 20 R10.htm IDEA: XBRL DOCUMENT v3.19.2
Goodwill
 6 Months Ended
Jun. 30, 2019
Goodwill [Abstract]  
Goodwill
Note 3.  Goodwill
The goodwill balance was $14.9 million as of June 30, 2019 and December 31, 2018. Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of June 30, 2019 and December 31, 2018, no impairment charges were taken.
XML 21 R11.htm IDEA: XBRL DOCUMENT v3.19.2
Fair Value Measurements
 6 Months Ended
Jun. 30, 2019
Fair Value Measurements [Abstract]  
Fair Value Measurements
Note 4.  Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and expands disclosures about fair value measurements. The framework requires the valuation of financial instruments using a three-tiered approach. The statement requires fair value measurement to be classified and disclosed in one of the following categories:

Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities;

Level 2:  Quoted prices in the markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

As of June 30, 2019 and December 31, 2018, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis.

As of June 30, 2019 and December 31, 2018, the carrying value of the Company’s 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the “Public Preferred Stock”) was $137.3 million and $135.4 million, respectively, and the estimated fair market value was $74.1 million and $41.4 million, respectively, based on quoted market prices.

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. The estimated fair value of the Facility and long-term debt is based primarily on borrowing rates currently available to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.
XML 22 R12.htm IDEA: XBRL DOCUMENT v3.19.2
Current Liabilities and Debt Obligations
 6 Months Ended
Jun. 30, 2019
Current Liabilities and Debt Obligations [Abstract]  
Current Liabilities and Debt Obligations
Note 5.  Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables
As of June 30, 2019 and December 31, 2018, the accounts payable and other accrued payables consisted of $19.9 million and $18.5 million, respectively, in trade account payables and $2.2 million and $3.3 million, respectively, in accrued payables.

Contract Liabilities 
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 condensed consolidated balance sheets on a net contract basis at the end of each reporting period. As of June 30, 2019 and December 31, 2018, the contract liabilities primarily consisted of product support services.

Enlightenment Capital Credit Agreement
On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement") with Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent") and the lenders party thereto (the "Lenders"), (together referenced as “EnCap”). The Credit Agreement provides for an $11 million senior term loan (the "Loan") with a maturity date of January 25, 2022, subject to acceleration in the event of customary events of default.

All borrowings under the Credit Agreement accrue interest at the rate of 13.0% per annum (the "Accrual Rate"). If, at the request of the Company, the Agent executes an intercreditor agreement with another senior lender under which the Agent and the Lenders subordinate their liens (an "Alternative Interest Rate Event"), the interest rate will increase to 14.5% per annum. After the occurrence and during the continuance of any event of default, the interest rate will increase 2.0%. The Company is obligated to pay accrued interest in cash on a monthly basis at a rate of not less than 10.0% per annum or, during the continuance of an Alternate Interest Rate Event, 11.5% per annum. The Company may elect to pay the remaining interest in cash, by payment-in-kind (by addition to the principal amount of the Loan) or by combination of cash and payment-in-kind. Upon thirty days days prior written notice, the Company may prepay any portion or the entire amount of the Loan.

An amount of approximately $1.1 million was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A separate fee letter executed by the Company and the Agent, dated January 25, 2017, sets forth the fees payable to the Agent in connection with the Credit Agreement.

The Credit Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type. In connection with the Credit Agreement, the Agent has been granted, for the benefit of the Lenders, a security interest in and general lien upon various property of the Company, subject to certain permitted liens and any intercreditor agreement. The occurrence of an event of default under the Credit Agreement could result in the Loan and other obligations becoming immediately due and payable and allow the Lenders to exercise all rights and remedies available to them under the Credit Agreement or as a secured party under the UCC, in addition to all other rights and remedies available to them.

In connection with the Credit Agreement, on January 25, 2017, the Company issued warrants (each, a "Warrant") to Agent and certain of the Lenders representing in the aggregate the right to purchase in accordance with their terms 1,135,284.333 shares of the Class A Common Stock of the Company, no par value per share, which is equivalent to approximately 2.5% of the common equity interests of the Company on a fully diluted basis. The exercise price is $1.321 per share and each Warrant expires on January 25, 2027. The value of the warrants was determined to be de minimis and no value was allocated to them on a relative fair value basis in accounting for the debt instrument.

Effective February 23, 2017, the Credit Agreement was amended to change the required timing of certain post-closing items to allow for more time to complete the legal and administrative requirements around such items. On April 18, 2017, the Credit Agreement was further amended (the “Second Amendment”) to incorporate the parties’ agreement to subordinate certain debt owed by the Company to the affiliated entities of Mr. John R. C. Porter (the “Subordinated Debt”) and to redeem all outstanding shares of the Series A-1 Redeemable Preferred Stock and the Series A-2 Redeemable Preferred Stock, including those owned by Mr. John R.C. Porter and his affiliates, for an aggregate redemption price of $2.1 million.

In connection with the Second Amendment and that subordination of debt, on April 18, 2017, we also entered into Subordination and Intercreditor Agreements (the “Intercreditor Agreements”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”), in which Porter agreed that the Subordinated Debt is fully subordinated to the amended Credit Agreement and related documents, and that required payments, if any, under the Subordinated Debt are permitted only if certain conditions are met.

The Credit Agreement also includes an $825,000 exit fee, which is payable upon any repayment or prepayment of the loan. This amount has been included in the total principal due and treated as an unamortized discount on the debt, which will be amortized over the term of the loan, using the effective interest method at a rate of 15.0%. We incurred fees and transaction costs of approximately $374,000 related to the issuance of the Credit Agreement, which are being amortized over the life of the Credit Agreement.

On March 30, 2018, the Credit Agreement was amended (the “Third Amendment”) to waive any actual or potential non-compliance with covenants in 2017 and to reset the covenants for 2018 measurement periods to more accurately reflect the Company’s projected performance for the year. The measurement against the covenants for consolidated leverage ratio and consolidated fixed charge coverage ratio were agreed to not be measured as of December 31, 2017 and were reset for 2018 measurement periods. Additionally, a minimum revenue covenant and a net working capital covenant were added. In consideration of these amendments, the interest rate on the loan was increased by 1%, which will revert back to the original rate upon achievement of two consecutive quarters of a specified fixed charge coverage ratio as defined in the agreement. The Company may elect to pay the increase in interest expense in cash or by payment-in-kind (by addition to the principal amount of the Loan). The increase in interest expense has been paid in cash.  Contemporaneously with the Third Amendment, Mr. John B. Wood agreed to transfer 50,000 shares of the Company’s Class A Common Stock owned by him to EnCap. We are in compliance with the Credit Agreement’s financial covenants, based on an agreement between the Company and EnCap on the definition of certain input factors that determine the measurement against the covenants.

The carrying amount of the Credit Agreement consisted of the following (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Senior term loan, including exit fee
 
$
11,825
  
$
11,825
 
Less:  Unamortized discount, debt issuance costs, and lender fees
  
(730
)
  
(841
)
Senior term loan, net
 
$
11,095
  
$
10,984
 

We incurred interest expense in the amount of $0.4 million and $0.8 million for each of the three and six months ended June 30, 2019 and 2018, respectively, under the Credit Agreement.

Accounts Receivable Purchase Agreement
On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC (“RCA” or “Buyer”), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the “Purchased Receivables”). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the “Maximum Amount”) at any given time. The Purchase Agreement had an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA. On March 2, 2018, the term of the Purchase Agreement was extended to June 30, 2020. No fee or consideration of any kind was paid in connection with this extension.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. Government, and 85% if the account debtor is not an agency of the U.S. Government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivables are outstanding; (iii) a commitment fee equal to 1% per annum of the Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements.

The Purchase Agreement provides that in the event, but only to the extent, that the conveyance of Purchased Receivables by the Company is characterized by a court or other governmental authority as a loan rather than a sale, the Company shall be deemed to have granted RCA, effective as of the date of the first purchase under the Purchase Agreement, a security interest in all of the Company’s right, title and interest in, to and under all of the Purchased Receivables, whether now or hereafter owned, existing or arising.

The Company provides a power of attorney to RCA to take certain actions in the Company’s stead, including (a) to sell, assign or transfer in whole or in part any of the Purchased Receivables; (b) to demand, receive and give releases to any account debtor with respect to amounts due under any Purchased Receivables; (c) to notify all account debtors with respect to the Purchased Receivables; and (d) to take any actions necessary to perfect RCA’s interests in the Purchased Receivables.

The Company is liable to the Buyer for any fraudulent statements and all representations, warranties, covenants, and indemnities made by the Company pursuant to the terms of the Purchase Agreement. It is considered an event of default if (a) the Company fails to pay any amounts it owes to RCA when due (subject to a cure period); (b) the Company has voluntary or involuntary bankruptcy proceedings commenced by or against it; (c) the Company is no longer solvent or is generally not paying its debts as they become due; (d) any voluntary liens, garnishments, attachments, or the like are issued against or attach to the Purchased Receivables; (e) the Company breaches any warranty, representation, or covenant (subject to a cure period); (f) the Company is not in compliance or has otherwise defaulted under any document or obligation in favor of RCA or an RCA affiliate; or (g) the Purchase Agreement or any material provision terminates (other than in accordance with the terms of the Purchase Agreement) or ceases to be effective or to be a binding obligation of the Company. If any such event of default occurs, then RCA may take certain actions, including ceasing to buy any eligible receivables, declaring any indebtedness or other obligations immediately due and payable, or terminating the Purchase Agreement.

Financing and Security Agreement
On July 15, 2016, we entered into a Financing and Security Agreement (the “Financing Agreement”) with Action Capital Corporation (“Action Capital”), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the “Acceptable Accounts”). The maximum outstanding principal amount of advances under the Financing Agreement was $5 million. The Financing Agreement had a term of two years years, provided that the Company may terminate it at any time without penalty upon written notice. On August 13, 2018, the Financing Agreement was extended through January 2, 2019. No fee or consideration of any kind was paid in connection with this extension. The Financing Agreement was not extended beyond this date.

Subordinated Debt
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes (“Porter Notes”) with affiliated entities of Mr. John R. C. Porter (together referenced as “Porter”). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the “Subordination Agreements”) with Porter and a prior senior lender, in which the Porter Notes were fully subordinated to the financing provided by that senior lender, and payments under the Porter Notes were permitted only if certain conditions are met. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017. 

On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extended the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes. As of June 30, 2019, approximately $947,000 of accrued interest was payable according to the stated interest rate of the Porter Notes.
XML 23 R13.htm IDEA: XBRL DOCUMENT v3.19.2
Redeemable Preferred Stock
 6 Months Ended
Jun. 30, 2019
Redeemable Preferred Stock [Abstract]  
Redeemable Preferred Stock
Note 6.  Redeemable Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006. The Public Preferred Stock was fully accreted as of December 2008. We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at June 30, 2019 and December 31, 2018 was 3,185,586. The Public Preferred Stock is quoted as "TLSRP" on the OTCQB marketplace and the OTC Bulletin Board.

 Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the various financing documents to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments have continued to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the various financing documents to which the Public Preferred Stock is subject, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018.

On January 25, 2017, we became parties with certain of our subsidiaries to the Credit Agreement with EnCap. Under the Credit Agreement, we agreed that, until full and final payment of the obligations under the Credit Agreement, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. Various financing documents to which the Public Preferred Stock is subject prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization of payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from June 30, 2019.  This classification is consistent with ASC 210, “Balance Sheet” and 470, “Debt” and the FASB ASC Master Glossary definition of “Current Liabilities.”

ASC 210 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period.  It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

If, pursuant to the terms of the Public Preferred Stock, we do not redeem the Public Preferred Stock in accordance with the scheduled redemptions described above, the terms of the Public Preferred Stock require us to discharge our obligation to redeem the Public Preferred Stock as soon as we are financially capable and legally permitted to do so. Therefore, by its very terms, the Public Preferred Stock is not due on demand or callable for failure to make a scheduled payment pursuant to its redemption provisions and is properly classified as a noncurrent liability.

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share, and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $105.4 million and $103.5 million as of June 30, 2019 and December 31, 2018, respectively. We accrued dividends on the Public Preferred Stock of $1.0 million and $1.9 million for each of the three and six months ended June 30, 2019 and 2018, respectively, which was recorded as interest expense. Prior to the effective date of ASC 480 on July 1, 2003, such dividends were charged to stockholders’ accumulated deficit.
XML 24 R14.htm IDEA: XBRL DOCUMENT v3.19.2
Income Taxes
 6 Months Ended
Jun. 30, 2019
Income Taxes [Abstract]  
Income Taxes
Note 7.  Income Taxes
The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur.  We review and update our estimated annual effective tax rate each quarter. We recorded an approximately $20,000 income tax provision and $177,000 income tax benefit for the three and six months ended June 30, 2019, respectively, and a $6,000 and $65,000 income tax provision for the three and six months ended June 30, 2018, respectively.  For the three and six months ended June 30, 2019 and 2018, our estimated annual effective tax rate was primarily impacted by the overall valuation allowance position which reduced the net tax impact from taxable income (loss) for all periods.

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 June 30, 2019 and December 31, 2018. Under the Tax Cuts and Jobs Act of 2017 (“Tax Act”), we will be able to use our hanging credit deferred tax liabilities as a source of taxable income to support the indefinite-lived net operating losses created by the future reversal of our temporary differences. Accordingly, we have re-measured our existing deferred tax assets and liabilities using the enacted tax rate, and adjusted the valuation allowance on our deferred taxes.  As a result, a deferred tax liability related to goodwill of $603,000 and $818,000 remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018, respectively. The income tax benefit recorded for the six months ended June 30, 2019 is primarily related to this change in deferred tax liability and is due to the state conformity to the indefinite-lived net operating loss provision of the Tax Act.

As a result of the Tax Act, we are subject to several provisions of the Tax Act including computations under Section 162(m) executive compensation limitation and Section 163(j) interest limitation rule. We have considered the impact of each of these provisions in our computation of tax expense for the three and six months ended June 30, 2019.

Under the provisions of ASC 740, we determined that there were approximately $660,000 and $648,000 of unrecognized tax benefits, including $291,000 and $278,000 of related interest and penalties, required to be recorded in other liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months.
XML 25 R15.htm IDEA: XBRL DOCUMENT v3.19.2
Commitments, Contingencies and Subsequent Events
 6 Months Ended
Jun. 30, 2019
Commitments, Contingencies and Subsequent Events [Abstract]  
Commitments, Contingencies and Subsequent Events
Note 8.  Commitments, Contingencies and Subsequent Events

Financial Condition and Liquidity
As described in Note 5 – Current Liabilities and Debt Obligations, we maintain a Credit Agreement with EnCap and a Purchase Agreement with RCA. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by EnCap, RCA, or other potential sources of financing. If we are unable to maintain the Purchase Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace the Purchase Agreement with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity, such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact our availability under our credit arrangements. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize cash resources without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our cash resources without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on our cash resources, our financing arrangements, and therefore our liquidity.

Management may determine that, in order to reduce capital and liquidity requirements, planned spending on capital projects and indirect expense growth may be curtailed, subject to growth in operating results. Additionally, management may seek to put in place a credit facility with a commercial bank, although no assurance can be given that such a facility could be put in place under terms acceptable to the Company. Should management determine that additional capital is required, management would likely look first to the sources of funding discussed above to meet any requirements, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.

Our working capital was $(4.5) million and $2.1 million as of June 30, 2019 and December 31, 2018, respectively. Although no assurances can be given, we expect that our financing arrangements with EnCap and RCA, collectively, and 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.

Legal Proceedings

Costa Brava Partnership III, L.P. and Wynnefield Partners Small Cap Value, L.P.v. Telos Corporation, et al.
As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, on October 17, 2005, Costa Brava Partnership III, L.P. (“Costa Brava”), a holder of our Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers ("Telos Defendants") 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 Class A common stock. As of June 30, 2019, Costa Brava and Wynnefield, directly and through affiliated funds, own 12.7% and 17.4%, respectively, of the outstanding Public Preferred Stock. There have been no material developments in this litigation during the three-month period ended June 30, 2019, and the matter remains pending.

At this stage of the litigation, it is impossible to reasonably determine the degree of probability related to Plaintiffs’ success in relation to any of their assertions in the litigation.  Although there can be no assurance as to the ultimate outcome of the case, the Company and its present and former officers and directors strenuously deny Plaintiffs’ allegations and continue to vigorously defend the matter and oppose all relief sought by Plaintiffs.

Hamot et al. v. Telos Corporation
As previously disclosed in Note 13 of the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018, since August 2, 2007, Messrs. Seth W. Hamot (“Hamot”) and Andrew R. Siegel (“Siegel”), principals of Costa Brava, have been involved in litigation against the Company as Plaintiffs and Counter-defendants in the Circuit Court. Mr. Siegel is a Class D Director of the Company and Mr. Hamot was a Class D Director of the Company until his resignation on March 9, 2018. On or about July 6, 2018, the attorneys representing Mr. Hamot filed a Notice of Substitution of Party in the Circuit Court and the Court of Special Appeals, providing notice that Mr. Steven Tannanbaum was appointed and qualified as the Special Personal Representative of the Estate of Seth Hamot to represent the estate in the litigation.

The Plaintiffs initially alleged that certain documents and records had not been provided to them promptly and were necessary to fulfill their duties as directors of the Company. Subsequently, the Plaintiffs further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood’s service as both CEO and Chairman of the Board was improper and impermissible under the Company’s Bylaws.

The Parties have fully briefed in the Court of Appeals of Maryland the issues related to the damages awarded to the Company on its Counterclaim for interference with one of its prior auditor relationships, and oral argument before the appellate court is scheduled for September 10, 2019.

At this stage of the litigation, in light of the pending review by the Court of Appeals of Maryland of issues related to the lower court’s handling of damages awarded to the Company in connection with Hamot and Siegel’s interference with the auditor relationship, it is impossible to reasonably determine the degree of probability related to the Company’s success in relation to any of the assertions in the foregoing litigation.

Other Litigation
In addition, the Company is a party to litigation arising in the ordinary course of business.  In the opinion of management, while the results of such litigation cannot be predicted with any reasonable degree of certainty, the final outcome of such known matters will not, based upon all available information, have a material adverse effect on the Company's condensed consolidated financial position, results of operations or cash flows.

Subsequent Events
On July 19, 2019, we entered into the Fourth Amendment to Credit Agreement and Waiver; First Amendment to Fee Letter (“Fourth Amendment”) to amend the Credit Agreement.  As a result of the Fourth Amendment, several terms of the Credit Agreement were amended, including the following:
●
The Company borrowed an additional $5 million from the Lenders, increasing the total amount of the principal to $16 million.
●
The maturity date of the Credit Agreement was amended from January 25, 2022 to January 15, 2021.
●
The prepayment price was amended as follows: (a) from January 26, 2019 through January 25, 2020, the prepayment price is 102% of the principal amount, (b) from January 26, 2020 through October 14, 2020, the prepayment price is 101% of the principal amount, and (c) from October 15, 2020 to the maturity date, the prepayment price will be at par.  However, the prepayment price for the additional $5 million loan attributable to the Fourth Amendment will be at par.
●
The following financial covenants, as defined in the Credit Agreement, were amended and updated: Consolidated Leverage Ratio, Consolidated Senior Leverage Ratio, Consolidated Capital Expenditures, Minimum Fixed Charge Coverage Ratio, and Minimum Consolidated Net Working Capital.
●
Any actual or potential non-compliance with the applicable provisions of the Credit Agreement were waived.
●
The borrowing under the Credit Agreement continues to be collateralized by substantially all of the Company’s assets including inventory, equipment and accounts receivable.
●
The Company paid the Agent a fee of $110,000 in connection with the Fourth Amendment.
●
The exit fee was increased from $825,000 to $1,200,000.
XML 26 R16.htm IDEA: XBRL DOCUMENT v3.19.2
Related Party Transactions
 6 Months Ended
Jun. 30, 2019
Related Party Transactions [Abstract]  
Related Party Transactions
Note 9.  Related Party Transactions
Emmett J. Wood, the brother of our Chairman and CEO, has been an employee of the Company since 1996. The amounts paid to this individual as compensation were $76,000 and $234,000 for the three and six months ended June 30, 2019, respectively, and $105,000 and $286,000 for the three and six months ended June 30, 2018, respectively. Additionally, as of June 30, 2019 and December 31, 2018, Mr. Wood owned 810,000 shares of the Company’s Class A Common Stock and 50,000 shares of the Company’s Class B Common Stock.

On March 31, 2015, the Company entered into the Porter Notes. Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 35.0% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the original terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The unpaid principal, together with interest, was originally due and payable in full on July 1, 2017. 

On April 18, 2017, we amended and restated the Porter Notes to reduce the interest rate from twelve percent (12%) to six percent (6%) per annum, to be accrued, and extends the maturity date from July 1, 2017 to July 25, 2022. Telos also entered into Intercreditor Agreements with Porter and EnCap, in which the Porter Notes are fully subordinated to the Credit Agreement and any subsequent senior lenders, and payments under the Porter Notes are permitted only if certain conditions are met. All other terms remain in full force and effect. We incurred interest expense in the amount of $82,000 and $162,000 for the three and six months ended June 30, 2019, respectively, and $76,000 and $151,000 for the three and six months ended June 30, 2018, respectively, on the Porter Notes.
XML 27 R17.htm IDEA: XBRL DOCUMENT v3.19.2
Leases
 6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases
Note 10 – Leases
We account for leases in accordance with ASC Topic 842, “Leases,” which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements.

In accordance with the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets, which represent our right to use an underlying asset for the lease term, and operating lease liabilities which represent our obligation to make lease payments. Generally, we enter into operating lease agreements for facilities. Finance lease assets are recorded within property and equipment, net of accumulated depreciation. The amount of operating lease liabilities due within 12 months are recorded in other current liabilities, with the remaining operating lease liabilities recorded as non-current liabilities in our consolidated balance sheet based on their contractual due dates. Finance lease liabilities are classified according to 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 which was 5.75% for all operating leases. Our operating lease agreements may include options to extend the lease term or terminate it early. We have included options to extend in the operating lease ROU assets and liabilities when we are reasonably certain that we will exercise such options. The weighted average remaining lease terms and discount rates for our operating leases were approximately 4.1 years and 5.75% and for our finance leases were approximately 9.8 years and 5.04% at June 30, 2019. Operating lease expense is recognized as rent expense on a straight-line basis over the lease term. Some of our operating leases contain lease and non-lease components, which we account for as a single component. We evaluate ROU assets for impairment consistent with our property and equipment policy disclosure included in our 2018 Form 10-K.

As of June 30, 2019, operating lease ROU assets were $1.7 million and operating lease liabilities were $1.9 million, of which $1.5 million were classified as noncurrent.

Future minimum lease commitments at June 30, 2019 were as follows (in thousands):

 
Year ending December 31,
 
Operating Leases
  
Finance Leases
 
2019 (excluding the six months ended June 30, 2019)
 
$
285
  
$
1,008
 
2020
  
564
   
2,045
 
2021
  
551
   
2,096
 
2022
  
395
   
2,149
 
2023
  
340
   
2,203
 
2024 and thereafter
  
28
   
12,917
 
Total lease payments
  
2,163
   
22,418
 
Less imputed interest
  
(237
)
  
(4,979
)
Total
 
$
1,926
  
$
17,439
 

The components of lease expense were as follows (in thousands):

  
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
Operating lease cost
 
$
147
  
$
294
 
         
Finance lease cost
        
    Amortization of right-of-use assets
 
$
305
  
$
610
 
    Interest on lease liabilities
  
222
   
447
 
Total finance lease cost
 
$
527
  
$
1,057
 

Supplemental cash flow information related to leases was as follows (in thousands):

  
Six Months Ended
June 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
   
Cash flows from operating activities - operating leases
 
$
261
 
Cash flows from operating activities - finance leases
  
987
 
Right-of-use assets obtained in exchange for lease obligations:
    
Operating leases
 
$
245
 
XML 28 R18.htm IDEA: XBRL DOCUMENT v3.19.2
General and Basis of Presentation (Policies)
 6 Months Ended
Jun. 30, 2019
General and Basis of Presentation [Abstract]  
Segment Reporting
Segment Reporting
Operating segments are defined as components of an enterprise for which separate 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 currently operate in one operating and reportable business segment for financial reporting purposes.  Our Chief Executive Officer is the CODM. The CODM only evaluates profitability based on consolidated results.
Recent Accounting Pronouncements
Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (ASC Topic 842)”, which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet and expands disclosures about leasing arrangements for both lessees and lessors, among other items, for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, which made the new standard effective for us on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC Topic 842): Targeted Improvements,” which allows for an additional transition method under the modified retrospective approach for the adoption of ASU 2016-02. The two permitted transition methods are (a) to apply the new lease requirements at the beginning of the earliest period presented (the Comparative Method) and (b) to apply the new lease requirements at the effective date (the Effective Date Method). Under both transition methods there is a cumulative effect adjustment. We adopted the standard on January 1, 2019 by applying the new lease requirements utilizing the Effective Date Method for all leases with terms greater than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which included carrying forward historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The adoption of this standard resulted in the recognition of right-of-use assets of $2.0 million and additional lease liabilities of $2.0 million as of January 1, 2019. The adoption of the standard did not have a material impact on our operating results or cash flows. The comparative periods have not been restated for the adoption of ASU 2016-02.

Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. While we are currently assessing the impact the adoption of this ASU will have on our condensed consolidated financial position, results of operations and cash flows, we do not believe the adoption of this ASU will have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 of the current goodwill impairment test, that requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirement for fair value measurement under ASC 820 to improve the effectiveness of such disclosures. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.
Revenue Recognition
Revenue Recognition
We account for revenue in accordance with Accounting Standard 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 good 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 to the performance obligation(s), and recognizing revenue as the performance obligations are satisfied. 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 to each performance obligation based on our best estimate of standalone selling price.

We account for a contract after it has been approved by the parties to the contract, the rights and the payment terms of the parties are identified, the contract has commercial substance and collectability is probable, which is presumed for our U.S. Government customers and prime contractors for which we perform as subcontractors to U.S. Government end-customers.

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 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, 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 Cyber Operations and Defense (“CO&D”) and IT & Enterprise Solutions business groups and for the sale of resold products in Telos ID and CO&D 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 DCAA audits of incurred cost submissions. This resulted in signed final rate agreement letters for 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 have 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 of our contracts do not include award or incentive fees. For incentive fees, we would include such fees in the transaction price to the extent we could reasonably estimate the amount of the fee.  With limited historical experience, we have not included any revenue related to incentive fees in our estimated transaction prices.  We may include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. We consider the contractual/legal basis for the claim (in 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.

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 condensed consolidated balance sheet.

Billed receivables are amounts billed and due from our customers and are reported within accounts receivable, net of reserve on the condensed 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 condensed consolidated balance sheet 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 international customers revenue 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.

  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Federal
 
$
33,774
  
$
32,858
  
$
62,757
  
$
62,569
 
State & Local, and Commercial
  
2,274
   
2,085
   
4,457
   
4,775
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 


  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Firm fixed-price
 
$
28,857
  
$
28,173
  
$
53,787
  
$
53,094
 
Time-and-materials
  
3,691
   
4,089
   
7,620
   
7,856
 
Cost plus fixed fee
  
3,500
   
2,681
   
5,807
   
6,394
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 

The following table discloses accounts receivable (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Billed accounts receivable
 
$
10,677
  
$
18,848
 
Unbilled receivables
  
17,246
   
16,000
 
Allowance for doubtful accounts
  
(306
)
  
(306
)
Receivables – net
 
$
27,617
  
$
34,542
 

The following table discloses contract liabilities (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Contract liabilities
 
$
4,363
  
$
5,232
 

As of June 30, 2019, we had $74.1 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 85.4% of our remaining performance obligations as revenue in 2019, an additional 14.2% in 2020, and the balance thereafter.  We recognized revenue of $1.2 million and $3.1 million during the three and six months ended June 30, 2019, respectively, and $1.5 million and $4.1 million during the three and six months ended June 30, 2018, respectively, that was included in the contract liabilities balance at the beginning of each fiscal year.
Accounts Receivable
Accounts Receivable
Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon management’s knowledge of the specific circumstances related to overdue balances. The allowance for doubtful accounts is adjusted based on such evaluation. Accounts receivable balances are written off against the allowance when management deems the balances uncollectible.

On July 15, 2016, the Company entered into an accounts receivable purchase agreement under which the Company sells certain accounts receivable to a third party, or the "Factor", without recourse to the Company. The Factor initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount the Factor receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to the Factor, the receivable is removed from the Company's condensed consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an accounts receivable until payment is received from the Factor. The balance of the sold receivables may not exceed $10 million. During the three and six months ended June 30, 2019, the Company sold approximately $4.4 million and $9.4 million of accounts receivable, respectively, and recognized a related loss of approximately $15,000 and $32,000 in selling, general and administrative expenses, respectively, for the same period. During the three and six months ended June 30, 2018, the Company sold approximately $2.0 million and $5.1 million of accounts receivable, respectively, and recognized a related loss of approximately $7,000 and $18,000 in selling, general and administrative expenses, respectively, for the same period. As of June 30, 2019, the balance of the sold accounts receivable was approximately $1.4 million, and the related deferred price was approximately $0.2 million. As of June 30, 2018, the balance of the sold accounts receivable was approximately $1.0 million, and the related deferred price was approximately $0.1 million. As of December 31, 2018, the balance of the sold accounts receivable was approximately $0.9 million, and the related deferred price was approximately $0.1 million.
Inventories
Inventories
Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted average method. Substantially all inventories consist of purchased commercial off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. An allowance for obsolete, slow-moving or nonsalable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards as well as the lack of forecasted sales for such inventory in the near future. Gross inventory was $5.4 million and $4.9 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $0.5 million as of June 30, 2019 and December 31, 2018.
Software Development Costs
Software Development Costs
Our policy on accounting for development costs of software to be sold is in accordance with ASC Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed.” Software development costs for software to be sold, leased or otherwise marketed 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. 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 June 30, 2019 and December 31, 2018, we capitalized $4.4 million and $3.1 million of software development costs, respectively, which are included as a part of property and equipment. Amortization expense was $0.5 million and $0.9 million for the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively. Accumulated amortization was $2.2 million and $1.3 million as of June 30, 2019 and December 31, 2018, 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.
Income Taxes
Income Taxes
We account for income taxes in accordance with ASC 740, “Income Taxes.”  Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.  We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of June 30, 2019 and December 31, 2018. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability related to goodwill remains on our condensed consolidated balance sheets at June 30, 2019 and December 31, 2018. 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 June 30, 2019 and December 31, 2018.

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.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.
Goodwill
Goodwill
We evaluate the impairment of goodwill and other intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31 each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, CO&D, Identity Management, and IT and Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit’s net asset carrying values. Our discounted cash flows required management'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 estimate of the total fair value of our reporting units is compared to the market capitalization of the Company. The Company’s assessment resulted in a fair value that was greater than the Company’s carrying value, therefore the second step of the impairment test, as prescribed by the authoritative literature, was not required to be performed and no impairment of goodwill was recorded as of  December 31, 2018. There were no triggering events which would require goodwill impairment consideration during the quarter. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair value of our reporting unit 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 charge in our consolidated statements of operations. Goodwill is amortized and deducted over a 15-year period for tax purposes.
Stock-Based Compensation
Stock-Based Compensation
Compensation cost is recognized based on the requirements of ASC 718, “Stock Compensation,” for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. To date, there have been no grants in 2019. 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 June 30, 2019, there were 1,213,750 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 our common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.  Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the condensed consolidated financial statements.
Other Comprehensive Income
Other Comprehensive Income
Our functional currency is the U.S. Dollar. For one of our wholly owned subsidiaries, the functional currency is the local currency. For this subsidiary, the translation of its foreign currency into U.S. Dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates during the period. Translation gains and losses are included in stockholders’ deficit as a component of accumulated other comprehensive income.

Accumulated other comprehensive income included within stockholders’ deficit consists of the following (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Cumulative foreign currency translation loss
 
$
(88
)
 
$
(90
)
Cumulative actuarial gain on pension liability adjustment
  
107
   
107
 
Accumulated other comprehensive income
 
$
19
  
$
17
 
XML 29 R19.htm IDEA: XBRL DOCUMENT v3.19.2
General and Basis of Presentation (Tables)
 6 Months Ended
Jun. 30, 2019
General and Basis of Presentation [Abstract]  
Disaggregation of Revenue
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 international customers revenue 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.

  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Federal
 
$
33,774
  
$
32,858
  
$
62,757
  
$
62,569
 
State & Local, and Commercial
  
2,274
   
2,085
   
4,457
   
4,775
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 


  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Firm fixed-price
 
$
28,857
  
$
28,173
  
$
53,787
  
$
53,094
 
Time-and-materials
  
3,691
   
4,089
   
7,620
   
7,856
 
Cost plus fixed fee
  
3,500
   
2,681
   
5,807
   
6,394
 
      Total
 
$
36,048
  
$
34,943
  
$
67,214
  
$
67,344
 
Contract Assets and Liabilities
The following table discloses accounts receivable (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Billed accounts receivable
 
$
10,677
  
$
18,848
 
Unbilled receivables
  
17,246
   
16,000
 
Allowance for doubtful accounts
  
(306
)
  
(306
)
Receivables – net
 
$
27,617
  
$
34,542
 

The following table discloses contract liabilities (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Contract liabilities
 
$
4,363
  
$
5,232
 
Accumulated Other Comprehensive Income
Accumulated other comprehensive income included within stockholders’ deficit consists of the following (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Cumulative foreign currency translation loss
 
$
(88
)
 
$
(90
)
Cumulative actuarial gain on pension liability adjustment
  
107
   
107
 
Accumulated other comprehensive income
 
$
19
  
$
17
 
XML 30 R20.htm IDEA: XBRL DOCUMENT v3.19.2
Non-controlling Interests (Tables)
 6 Months Ended
Jun. 30, 2019
Non-controlling Interests [Abstract]  
Changes in Non-Controlling Interest
The following table details the changes in non-controlling interest for the three and six months ended June 30, 2019 and 2018 (in thousands):

  
Three Months Ended June 30,
  
Six Months Ended June 30,
 
  
2019
  
2018
  
2019
  
2018
 
Non-controlling interest, beginning of period
 
$
2,378
  
$
1,147
  
$
2,621
  
$
913
 
Net (loss) income
  
(253
)
  
531
   
220
   
765
 
Distributions
  
(268
)
  
(905
)
  
(984
)
  
(905
)
Non-controlling interest, end of period
 
$
1,857
  
$
773
  
$
1,857
  
$
773
 
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Current Liabilities and Debt Obligations (Tables)
 6 Months Ended
Jun. 30, 2019
Current Liabilities and Debt Obligations [Abstract]  
Carrying Amount of the Credit Agreement
The carrying amount of the Credit Agreement consisted of the following (in thousands):

  
June 30, 2019
  
December 31, 2018
 
Senior term loan, including exit fee
 
$
11,825
  
$
11,825
 
Less:  Unamortized discount, debt issuance costs, and lender fees
  
(730
)
  
(841
)
Senior term loan, net
 
$
11,095
  
$
10,984
 
XML 32 R22.htm IDEA: XBRL DOCUMENT v3.19.2
Leases (Tables)
 6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Future Minimum Lease Commitments
Future minimum lease commitments at June 30, 2019 were as follows (in thousands):

 
Year ending December 31,
 
Operating Leases
  
Finance Leases
 
2019 (excluding the six months ended June 30, 2019)
 
$
285
  
$
1,008
 
2020
  
564
   
2,045
 
2021
  
551
   
2,096
 
2022
  
395
   
2,149
 
2023
  
340
   
2,203
 
2024 and thereafter
  
28
   
12,917
 
Total lease payments
  
2,163
   
22,418
 
Less imputed interest
  
(237
)
  
(4,979
)
Total
 
$
1,926
  
$
17,439
 
Components of Lease Expense
The components of lease expense were as follows (in thousands):

  
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
Operating lease cost
 
$
147
  
$
294
 
         
Finance lease cost
        
    Amortization of right-of-use assets
 
$
305
  
$
610
 
    Interest on lease liabilities
  
222
   
447
 
Total finance lease cost
 
$
527
  
$
1,057
 
Supplemental Cash Flow Information Related to Leases
Supplemental cash flow information related to leases was as follows (in thousands):

  
Six Months Ended
June 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
   
Cash flows from operating activities - operating leases
 
$
261
 
Cash flows from operating activities - finance leases
  
987
 
Right-of-use assets obtained in exchange for lease obligations:
    
Operating leases
 
$
245
 
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General and Basis of Presentation (Details)
 3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2019
USD ($)
shares
Jun. 30, 2018
USD ($)
Jun. 30, 2019
USD ($)
Segment
Reportingunit
shares
Jun. 30, 2018
USD ($)
Dec. 31, 2018
USD ($)
Segment Reporting [Abstract]          
Number of reportable segments | Segment     1    
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]          
Right-of-use assets $ 1,727,000   $ 1,727,000   $ 0
Lease liabilities 1,926,000   1,926,000    
Disaggregation of Revenue [Abstract]          
Revenue 36,048,000 $ 34,943,000 67,214,000 $ 67,344,000  
Components of Accounts Receivable [Abstract]          
Billed accounts receivable 10,677,000   10,677,000   18,848,000
Unbilled receivables 17,246,000   17,246,000   16,000,000
Allowance for doubtful accounts (306,000)   (306,000)   (306,000)
Receivables - net 27,617,000   27,617,000   34,542,000
Components of Contract Liabilities [Abstract]          
Contract liabilities 4,363,000   4,363,000   5,232,000
Revenue, Performance Obligation [Abstract]          
Remaining performance obligation 74,100,000   74,100,000    
Revenue recognized included in opening contract liabilities 1,200,000 1,500,000 $ 3,100,000 4,100,000  
Accounts Receivable [Abstract]          
Percentage of initial payment by factor of U.S. Federal government receivables     90.00%    
Percentage of initial payment by factor of commercial prime contractors     85.00%    
Maximum limit of sold receivables     $ 10,000,000    
Sold receivables during the period 4,400,000 2,000,000 9,400,000 5,100,000  
Loss recognized in selling, general and administrative expenses 15,000 7,000 32,000 18,000  
Balance of sold receivables     1,400,000 1,000,000 900,000
Deferred price related to sold receivables     200,000 100,000 100,000
Inventories [Abstract]          
Gross inventory 5,400,000   5,400,000   4,900,000
Inventory obsolescence reserves 520,000   520,000   520,000
Software Development Costs [Abstract]          
Capitalized software development costs 4,400,000   $ 4,400,000   3,100,000
Software development estimated useful life     2 years    
Amortization expense 500,000 200,000 $ 900,000 400,000  
Accumulated amortization 2,200,000   $ 2,200,000   1,300,000
Goodwill [Abstract]          
Number of reporting units | Reportingunit     3    
Goodwill amortization period for income tax purposes     15 years    
Accumulated Other Comprehensive Income [Abstract]          
Cumulative foreign currency translation loss (88,000)   $ (88,000)   (90,000)
Cumulative actuarial gain on pension liability adjustment 107,000   107,000   107,000
Accumulated other comprehensive income 19,000   19,000   17,000
Firm Fixed-Price [Member]          
Disaggregation of Revenue [Abstract]          
Revenue 28,857,000 28,173,000 53,787,000 53,094,000  
Time-and-Materials [Member]          
Disaggregation of Revenue [Abstract]          
Revenue 3,691,000 4,089,000 7,620,000 7,856,000  
Cost Plus Fixed Fee [Member]          
Disaggregation of Revenue [Abstract]          
Revenue $ 3,500,000 2,681,000 $ 5,807,000 6,394,000  
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-07-01          
Revenue, Performance Obligation [Abstract]          
Remaining performance obligation percentage 85.40%   85.40%    
Remaining performance obligation, expected timing of satisfaction, period 6 months   6 months    
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01          
Revenue, Performance Obligation [Abstract]          
Remaining performance obligation percentage 14.20%   14.20%    
Remaining performance obligation, expected timing of satisfaction, period      
Federal [Member]          
Disaggregation of Revenue [Abstract]          
Revenue $ 33,774,000 32,858,000 $ 62,757,000 62,569,000  
State & Local, and Commercial [Member]          
Disaggregation of Revenue [Abstract]          
Revenue $ 2,274,000 $ 2,085,000 $ 4,457,000 $ 4,775,000  
Restricted Stock Grants [Member]          
Restricted Stock Grants [Abstract]          
Restricted stock remained subject to vesting (in shares) | shares 1,213,750   1,213,750    
Restricted stock vested on date of grant     25.00%    
Restricted stock vest on anniversary of the date of grant     25.00%    
ASU 2016-02 [Member]          
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]          
Right-of-use assets         2,000,000
Lease liabilities         2,000,000
ASC 606 [Member]          
Revenue from Contract with Customer [Abstract]          
Revenue accruals for multiple contracts as a result of cumulative indirect rate adjustments         $ 6,000,000
XML 34 R24.htm IDEA: XBRL DOCUMENT v3.19.2
Non-controlling Interests (Details)
 3 Months Ended 6 Months Ended
Dec. 24, 2014
USD ($)
Director
Class
Apr. 20, 2007
USD ($)
Apr. 19, 2007
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Apr. 11, 2007
USD ($)
Changes in non-controlling interest [Abstract]                
Non-controlling interest, beginning of period       $ 2,378,000 $ 1,147,000 $ 2,621,000 $ 913,000  
Net (loss) income       (253,000) 531,000 220,000 765,000  
Distributions       (268,000) (905,000) (984,000) (905,000)  
Non-controlling interest, end of period       $ 1,857,000 $ 773,000 $ 1,857,000 $ 773,000  
Telos ID [Member]                
Net book value of assets [Abstract]                
Net book value of assets contributed               $ 17,000
Percentage of membership interest owned before     99.999%          
Owned membership interest from private equity investors     0.001%          
Percentage of membership interest sold to investor 10.00% 39.999%            
Cash consideration received on sale of membership interest $ 5,000,000 $ 6,000,000            
Recognized gain on sale of membership interests to the Investors   $ 5,800,000            
Percentage of ownership interest owned after transaction   60.00%            
Number of members in board of director | Director 5              
Number of classes of membership units | Class 2              
Telos ID [Member] | Class A Membership Unit [Member]                
Net book value of assets [Abstract]                
Percentage of ownership interest owned after transaction 50.00%              
Percentage of profit and loss allocated 50.00%              
Number of directors entitled to appoint | Director 3              
Percentage of outstanding voting securities 51.00%              
Telos ID [Member] | Class B Membership Unit [Member]                
Net book value of assets [Abstract]                
Percentage of ownership interest owned after transaction 50.00%              
Percentage of profit and loss allocated 50.00%              
Number of directors entitled to appoint | Director 2              
Percentage of ownership interests 50.00%              
XML 35 R25.htm IDEA: XBRL DOCUMENT v3.19.2
Goodwill (Details) - USD ($)
$ in Thousands
 6 Months Ended 12 Months Ended
Jun. 30, 2019
Dec. 31, 2018
Goodwill [Abstract]    
Goodwill $ 14,916 $ 14,916
Asset impairment charges $ 0 $ 0
XML 36 R26.htm IDEA: XBRL DOCUMENT v3.19.2
Fair Value Measurements (Details) - Public Preferred Stock [Member] - USD ($)
$ / shares in Units, $ in Millions
 6 Months Ended 12 Months Ended
Jun. 30, 2019
Dec. 31, 2018
Dec. 31, 1991
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Abstract]      
Preferred stock dividend rate per annum 12.00% 12.00% 6.00%
Public preferred stock par value (in dollar per share) $ 0.01 $ 0.01  
Carrying (Reported) Amount, Fair Value Disclosure [Member]      
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Abstract]      
Public preferred stock $ 137.3 $ 135.4  
Estimate of Fair Value, Fair Value Disclosure [Member]      
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Abstract]      
Public preferred stock $ 74.1 $ 41.4  
XML 37 R27.htm IDEA: XBRL DOCUMENT v3.19.2
Current Liabilities and Debt Obligations, Enlightenment Capital Credit Agreement (Details) - USD ($)
 3 Months Ended 6 Months Ended
Jan. 25, 2017
Mar. 31, 2015
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Apr. 18, 2017
Accounts Payable and Other Accrued Payables [Abstract]                
Trade account payables     $ 19,900,000   $ 19,900,000   $ 18,500,000  
Accrued trade payables     2,200,000   2,200,000   3,300,000  
Enlightenment Capital Credit Agreement [Abstract]                
Senior term loan, net     $ 11,095,000   11,095,000   10,984,000  
Credit Agreement [Member]                
Enlightenment Capital Credit Agreement [Abstract]                
Increase in interest rate     1.00%          
Credit agreement exit fee     $ 825,000   $ 825,000      
Effective interest rate     15.00%   15.00%      
Credit agreement transaction costs         $ 374,000      
Senior term loan principal, including exit fee     $ 11,825,000   11,825,000   11,825,000  
Less: Unamortized discount, debt issuance costs, and lender fees     (730,000)   (730,000)   (841,000)  
Senior term loan, net     11,095,000   11,095,000   $ 10,984,000  
Interest expense     $ 400,000 $ 400,000 $ 800,000 $ 800,000    
Class A Common Stock [Member] | Credit Agreement [Member] | Mr. John B. Wood [Member]                
Enlightenment Capital Credit Agreement [Abstract]                
Number of shares held by chief executive officer (in shares)     50,000   50,000      
Porter [Member]                
Enlightenment Capital Credit Agreement [Abstract]                
Maturity date   Jul. 01, 2017     Jul. 25, 2022      
Aggregate redemption price               $ 2,100,000
Enlightenment Capital Solutions Fund, II L.P. [Member] | Class A Common Stock [Member]                
Enlightenment Capital Credit Agreement [Abstract]                
Warrants issued to purchase shares of common stock (in shares) 1,135,284.333              
Common stock par value (in dollars per share) $ 0              
Percentage of warrants issued of common equity interests 2.50%              
Warrants exercise price (in dollars per share) $ 1.321              
Warrants expiration date         Jan. 25, 2027      
Term Loan [Member] | Enlightenment Capital Solutions Fund, II L.P. [Member]                
Enlightenment Capital Credit Agreement [Abstract]                
Senior term loan $ 11,000,000              
Maturity date         Jan. 25, 2022      
Accrual rate 13.00%              
Increase in interest rate 14.50%              
Increase in interest rate in event of default 2.00%              
Monthly accrued interest rate 10.00%              
Monthly accrued interest rate during continuance of an Alternate Interest Rate Event 11.50%              
Number of days prior written notice         30 days      
Proceeds from loan prepayment $ 1,100,000              
XML 38 R28.htm IDEA: XBRL DOCUMENT v3.19.2
Current Liabilities and Debt Obligations, Accounts Receivable Purchase Agreement & Financing and Security Agreement (Details) - USD ($)
$ in Millions
 6 Months Ended
Jul. 15, 2016
Jun. 30, 2019
Republic Capital Access LLC [Member] | Accounts Receivable Purchase Agreement [Member]    
Accounts Receivable Purchase Agreement [Abstract]    
Limit of outstanding purchased receivables $ 10  
Automatic renewal term   12 months
Percentage of initial purchase price of purchased receivable 85.00%  
Residual percentage of purchased receivable 15.00%  
Percentage of discount factor for federal government prime contracts 0.30%  
Percentage of discount factor for non-federal government investment grade account obligors 0.56%  
Percentage of discount factor for non-federal government non-investment grade account obligors 0.62%  
Percentage of program access fee 0.008%  
Percentage of commitment fee 1.00%  
Republic Capital Access LLC [Member] | US Government Agency [Member] | Accounts Receivable Purchase Agreement [Member]    
Accounts Receivable Purchase Agreement [Abstract]    
Percentage of initial purchase price of purchased receivable 90.00%  
Residual percentage of purchased receivable 10.00%  
Action Capital Corporation [Member] | Financing and Security Agreement [Member]    
Financing and Security Agreement [Abstract]    
Percentage of advances 90.00%  
Maximum outstanding principal amount of advances $ 5  
Financing agreement term   2 years
XML 39 R29.htm IDEA: XBRL DOCUMENT v3.19.2
Current Liabilities and Debt Obligations, Subordinated Debt (Details) - Porter [Member] - USD ($)
 3 Months Ended 6 Months Ended
Mar. 31, 2015
Jun. 30, 2019
Jun. 30, 2018
Mar. 31, 2015
Jun. 30, 2019
Jun. 30, 2018
Apr. 18, 2017
Subordinated Debt [Abstract]              
Related party ownership percentage 35.00%     35.00%      
Proceeds from related party, debt       $ 2,500,000      
Debt instrument, fixed interest rate 12.00%     12.00%     6.00%
Debt instrument, first interest payment due date         Aug. 20, 2015    
Debt instrument, last principal and interest payment date Jul. 01, 2017       Jul. 25, 2022    
Interest expense, related party   $ 82,000 $ 76,000   $ 162,000 $ 151,000  
Accrued interest payable   $ 947,000     $ 947,000    
XML 40 R30.htm IDEA: XBRL DOCUMENT v3.19.2
Redeemable Preferred Stock (Details) - Public Preferred Stock [Member]
$ / shares in Units, $ in Millions
 3 Months Ended 6 Months Ended 12 Months Ended
Nov. 30, 1998
shares
Jun. 30, 2019
USD ($)
$ / shares
shares
Jun. 30, 2018
USD ($)
Jun. 30, 2006
USD ($)
Jun. 30, 2019
USD ($)
Tranche
$ / shares
shares
Jun. 30, 2018
USD ($)
Dec. 31, 2018
USD ($)
shares
Dec. 31, 1991
$ / shares
shares
Dec. 31, 1990
shares
Preferred stock [Abstract]                  
Preferred stock authorized (in shares)   6,000,000     6,000,000        
Preferred stock par value (in dollars per share) | $ / shares   $ 0.01     $ 0.01        
Preferred stock dividend rate per annum         12.00%   12.00% 6.00%  
Dividends Payable | $   $ 105.4     $ 105.4   $ 103.5    
Preferred stock issued and outstanding (in shares)   3,185,586     3,185,586   3,185,586    
Preferred stock issued (in shares)                 2,858,723
12% Cumulative Exchangeable Redeemable Preferred Stock [Abstract]                  
Adjusted accrued accretion of public preferred stock | $       $ 1.5          
Number of shares declared as dividend (in shares)               736,863  
Number of annual tranches during the period | Tranche         5        
Period during which redeemable preferred stock not callable         12 months        
Preferred stock dividend rate per annum (in dollars per share) | $ / shares         $ 1.20     $ 0.60  
Preferred stock, liquidation preference (in dollars per share) | $ / shares   $ 10     $ 10        
Dividends on preferred stock | $   $ 1.0 $ 1.0   $ 1.9 $ 1.9      
Redemption of public preferred stock (in shares) 410,000                
XML 41 R31.htm IDEA: XBRL DOCUMENT v3.19.2
Income Taxes (Details) - USD ($)
 3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Income Taxes [Abstract]          
(Provision) benefit for income taxes $ (20,000) $ (6,000) $ 177,000 $ (65,000)  
Deferred income taxes (Note 7) 603,000   603,000   $ 818,000
Unrecognized tax benefits 660,000   660,000   648,000
Interest and penalties $ 291,000   $ 291,000   $ 278,000
XML 42 R32.htm IDEA: XBRL DOCUMENT v3.19.2
Commitments, Contingencies and Subsequent Events (Details) - USD ($)
Jul. 19, 2019
Jul. 18, 2019
Jun. 30, 2019
Dec. 31, 2018
Financial Condition and Liquidity [Abstract]        
Working capital     $ (4,500,000) $ 2,100,000
Subsequent Events [Member] | Enlightenment Capital Solutions Fund, II L.P. [Member]        
Subsequent Events [Abstract]        
Additional borrowings $ 5,000,000      
Principal amount $ 16,000,000      
Maturity date Jan. 15, 2021 Jan. 25, 2022    
Prepayment price percentage for January 26, 2019 to January 25, 2020 102.00%      
Prepayment price percentage for January 26, 2020 to October 14, 2020 101.00%      
Agent fee $ 110,000      
Exit fee $ 1,200,000 $ 825,000    
Costa Brava [Member]        
Legal proceedings [Abstract]        
Percentage of public preferred stock owned     12.70%  
Wynnefield [Member]        
Legal proceedings [Abstract]        
Percentage of public preferred stock owned     17.40%  
XML 43 R33.htm IDEA: XBRL DOCUMENT v3.19.2
Related Party Transactions (Details) - USD ($)
 3 Months Ended 6 Months Ended
Mar. 31, 2015
Jun. 30, 2019
Jun. 30, 2018
Mar. 31, 2015
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Apr. 18, 2017
Emmett J. Wood [Member]                
Related party transactions compensation [Abstract]                
Compensation to related parties   $ 76,000 $ 105,000   $ 234,000 $ 286,000    
Emmett J. Wood [Member] | Class A Common Stock [Member]                
Related party transactions compensation [Abstract]                
Number of shares held by related party (in shares)   810,000     810,000   810,000  
Emmett J. Wood [Member] | Class B Common Stock [Member]                
Related party transactions compensation [Abstract]                
Number of shares held by related party (in shares)   50,000     50,000   50,000  
Porter [Member]                
Related party transactions compensation [Abstract]                
Proceeds from related party, debt       $ 2,500,000        
Debt instrument, fixed interest rate 12.00%     12.00%       6.00%
Debt instrument, first interest payment due date         Aug. 20, 2015      
Debt instrument, last principal and interest payment date Jul. 01, 2017       Jul. 25, 2022      
Interest expense, related party   $ 82,000 $ 76,000   $ 162,000 $ 151,000    
Porter [Member] | Class A Common Stock [Member]                
Related party transactions compensation [Abstract]                
Percentage of shares owned 35.00%     35.00%        
XML 44 R34.htm IDEA: XBRL DOCUMENT v3.19.2
Leases (Details) - USD ($)
$ in Thousands
 3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2019
Dec. 31, 2018
Weighted Average Remaining Lease Term [Abstract]      
Operating leases 4 years 1 month 6 days 4 years 1 month 6 days  
Finance leases 9 years 9 months 18 days 9 years 9 months 18 days  
Weighted Average Discount Rate [Abstract]      
Operating leases 5.75% 5.75%  
Finance leases 5.04% 5.04%  
Operating Leases, Right-of-Use Assets and Lease Liabilities [Abstract]      
Right-of-use asset $ 1,727 $ 1,727 $ 0
Operating lease liabilities, non-current 1,454 1,454 $ 0
Future Minimum Lease Commitments [Abstract]      
2019 (excluding the six months ended June 30, 2019) 285 285  
2020 564 564  
2021 551 551  
2022 395 395  
2023 340 340  
2024 and thereafter 28 28  
Total lease payments 2,163 2,163  
Less imputed interest (237) (237)  
Total 1,926 1,926  
Finance Lease Liabilities, Payments, Due [Abstract]      
2019 (excluding the six months ended June 30, 2019) 1,008 1,008  
2020 2,045 2,045  
2021 2,096 2,096  
2022 2,149 2,149  
2023 2,203 2,203  
2024 and thereafter 12,917 12,917  
Total lease payments 22,418 22,418  
Less imputed interest (4,979) (4,979)  
Total 17,439 17,439  
Lease, Cost [Abstract]      
Operating lease cost 147 294  
Finance lease cost [Abstract]      
Amortization of right-of-use assets 305 610  
Interest on lease liabilities 222 447  
Total finance lease cost $ 527 1,057  
Cash paid for amounts included in the measurement of lease liabilities: [Abstract]      
Cash flows from operating activities - operating leases   261  
Cash flows from operating activities - finance leases   987  
Right-of-use assets obtained in exchange for lease obligations: [Abstract]      
Operating leases   $ 245  
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