10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) 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
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (703) 724-3800

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).YesNo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer                   Accelerated filer                    Non-accelerated filer             Smaller reporting company 

(Do not check if a smaller reporting company) 

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

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2016:  Not applicable

As of March 24, 2017, the registrant had outstanding 40,238,461 shares of Class A Common Stock, no par value; and 4,037,628 shares of Class B Common Stock, no par value.

DOCUMENTSINCORPORATED BY REFERENCE:

Certain of the information required in Part III of this Form 10-K is incorporated by reference to the Registrant's definitive proxy statement to be filed for the Annual Meeting of Stockholders to be held on May 11, 2017.

1

TABLE OF CONTENTS
		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Mine Safety Disclosures	11
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8.	Consolidated Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
Item 9A.	Controls and Procedures	57
Item 9B.	Other Information	57
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	58
Item 11.	Executive Compensation	58
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	58
Item 13.	Certain Relationships and Related Transactions, and Director Independence	58
Item 14.	Principal Accountant Fees and Services	58
PART IV
Item 15.	Exhibits and Financial Statement Schedules	59
Item 16.	Form 10-K Summary	61
	Signatures	62

2

Special Note Regarding Forward-Looking Statements

This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, in the future the Company, and others on its behalf, may make statements that constitute forward-looking statements. Such forward-looking statements may include, without limitation, statements relating to the Company's plans, objectives or goals; future economic performance or prospects; the potential effect on the Company's future performance of certain contingencies; and assumptions underlying any such statements.

Words such as "believes," "anticipates," "expects," "intends" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. The forward-looking statements are and will be based upon management's then current views and assumptions regarding future events and operating performance and are only applicable as of the dates of such statements. The Company does not intend to update these forward-looking statements except as may be required by applicable laws.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other outcomes described or implied in forward-looking statements will not be achieved. The Company cautions you that a number of important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, including without limitation the risks described under the caption "Risk Factors" in this Annual Report on Form 10-K. You are cautioned not to place undue reliance on the Company's forward-looking statements.

PART I

Item 1.  Business

Overview

Telos Corporation, together with its subsidiaries, (the "Company" or "Telos" or "We") is an information technology leader focused on designing and providing advanced technologies to deliver solutions that empower and protect the world's most demanding enterprises. We empower our customers with secure solutions that leverage mobile communication, cloud technology, and real-time collaboration.  We protect vital assets that include the critical operational and tactical systems of our customers so that they can safely conduct their global missions. Our customer base consists primarily of military, intelligence and civilian agencies of the federal government and NATO allies around the world.

We generate approximately 76.0% of our revenues by delivering these solutions at a fixed price to our customers. This focus on fixed price delivery has enabled us to significantly reduce life cycle costs for our customers. We have been able to achieve this by investing in intellectual property development so that we can use automation, when appropriate.

While we were incorporated in 1971, we liquidated and/or sold our original businesses and refocused on delivering secure solutions beginning in 1997. Our Company includes Telos Corporation, Xacta Corporation, Teloworks, Inc., and a 50% interest in Telos Identity Management Solutions, LLC ("Telos ID").

We were incorporated in Maryland, our headquarters are located at 19886 Ashburn Road, Ashburn, VA 20147, and our telephone number is (703) 724-3800. Our website is www.telos.com.

Our Mission

Our mission is to protect critical information assets with solutions and services for cyber security, secure mobility, and identity management.

We believe that our customer focus is the foundation of our success to date. We also believe that this focus is critical for the creation of long-term value.

How We Provide Value to Our Customers

We serve our customers by developing solutions that are quickly and efficiently deployed so that our customers have the assurance that they can safely conduct their vital missions around the world. Some of the key benefits we offer our customers include:

Protecting and Securing Assets. Whether we are guarding access to systems, networks, communications, or people, our solutions work to protect what is most important to today's security-conscious enterprises.

Applying Specialized Expertise. Our teams of security professionals, such as those we provide to protect the Pentagon's critical networks, are some of the industry's most experienced in the design and operation of communications systems that must be reliable and secured 24/7.

3

Achieving Regulatory Compliance. From embedding the latest security standards in our information assurance software, to complying with network security requirements on a particular military base, our solutions give our customers the confidence in their ability to meet established security regulations.

Ensuring the Reliability of Operations. Our testing is comprehensive, assuring our customers of a dependable product when delivered. Our support is worldwide, extending from helpdesk resources for government agencies throughout the country to field support overseas.

Leveraging Customers' Existing Infrastructure. Our pre-deployment assessment of our customers' environments, ranging from secure network site surveys to evaluations of physical security access, assures our customers of the technical and operational compatibility of our solutions.

Selected Examples of How We Accomplish Our Mission

We protect the systems of our customers through the development and delivery of our Xacta IA Manager software ("Xacta"). Xacta is the premier solutions for continuous assessment and authorization, and is used throughout the Department of Defense, intelligence communities and civilian government. We have performed thousands of certifications and our product has been adopted by numerous enterprises as their solutions of choice and ongoing compliance for risk management.

We streamline and automate the process of selecting, applying, and monitoring security controls for cloud-based systems and applications, so that security-conscious organizations can migrate their workloads to the cloud faster and more efficiently. We also deploy, protect and extend the wireless networks of our customers around the world, as well as secure the communications on the network with solutions that disguise the identity and location of network users and assets.

We protect and enhance the communications of our customers through the development and delivery of our Telos Automated Message Handling System ("AMHS"), which has been adopted by the Department of Defense to carry all official message traffic and is implemented throughout all branches of the military, the intelligence community and other critical civilian agencies. AMHS is also used by U.S. Central Command to meet its critical organization and communications requirements in the CENTCOM Theater of Operations including Iraq and Afghanistan.

Through an exclusive subcontractor relationship with Telos ID, we assess, design and deliver identity and access solutions to protect national security assets, people and facilities. Among these programs is the leading designated aviation channeling service for the general aviation industry, serving nearly 60 airports, airlines, and aviation customers across the country. Telos ID also supports the premier federal identity application, which has issued almost 40,400,000 smart card based secure credentials for active duty uniformed service personnel, Selected Reserve, Department of Defense ("DoD") civilian employees, and eligible contractor personnel. Additionally, we provide near real-time data collection on personnel movement and location information for operating forces, government civil servants and government contractors in specified operational theaters. This system has captured over 517,000,000 scans by more than 2,700,000 U.S. Government, U.S. Military and company contractors since its inception.

We would not be able to design, deliver, install, and support any of our solutions without our employees. They are a vital element of our success. We provide competitive pay and benefits and a work environment that promotes employee retention.

Solutions For Our Customers

Our solution development philosophy involves responding to proven market demand with rapid development and continuous innovation in an effort to meet and anticipate our customers' dynamic and evolving requirements.  

Our solutions consist of the following:

● Cyber Operations and Defense:

o Cyber Security – Solutions and services that assure the security of our customers' information, systems, and networks, including the Xacta IA Manager suite for IT governance, risk management, and compliance. Our information and cyber security consulting services include security assessments, digital forensics, and continuous compliance monitoring.

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

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

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

4

The Technology Behind Our Solutions

● Techniques: We employ development and production methodologies such as Agile and ISO 9001 to ensure predictability, repeatability, and quality. Techniques such as continuous integration are employed to accelerate the solution development and testing process while at the same time reducing cost and improving quality. We believe such techniques are critical for providing our customers with a high quality user experience.

● Architecture:  The nature of our customers' missions requires our solutions to be highly secure and scalable. Aside from architecting our solutions with these core objectives in mind, we also employ open standards and technologies that afford a high degree of flexibility and interoperability needed to support web-based and netcentric operations.

Intellectual Property

We invest in the creation of intellectual property and employ various forms of legal intellectual property protection mechanisms including the use of copyright, trademark, patent, and trade secret laws in North America and other jurisdictions. We have intellectual property reviews as an integral part of our development process in order to identify intellectual property as early as possible in the development process so the appropriate form of protection can be obtained. We also vigorously control access to intellectual property via physical and logical protection mechanisms. All of our employees sign agreements that govern intellectual property ownership and confidentiality. We also enter into intellectual property, confidentiality and non-disclosure agreements with partners and other third parties.

Patents, Trademarks, Trade Secrets and Licenses

We have made it a practice of obtaining patent, copyright and/or trademark protection on our products, processes and marks where possible. We own a number of patents and copyrights, which we believe to be of material importance to the Company. Our patents and copyrights extend for varying periods of time based on the date of application or registration. Generally, registered copyright protection continues for a term of at least 70 years. Trademark and service mark protection for registered marks generally continues for as long as the marks are used.

Telos and Xacta are trademarks of Telos Corporation. Telos ID is a trademark of Telos ID.

Sales and Marketing

We target decision makers in government agencies and departments, and commercial businesses who have a need for secure enterprise solutions. Decisions regarding contract awards by our customers typically are based upon an assessment of the quality of our past performance, responsiveness to proposal requirements, uniqueness of the offering itself, price, and other competitive factors.

Our products and services in many instances combine a wide range of skills drawn from each of our major product and service offerings. Accordingly, we must maintain expert knowledge of federal agency policies, procedures and operations.

We employ marketing and business development professionals who identify, qualify, and sell opportunities for us. Virtually all of our officers and managers, including the chief executive officer, other executive officers, vice presidents, and division managers, actively engage in new business development.

We have strategic business relationships with certain companies in the information technology industry. These strategic partners have business objectives compatible with ours, and offer products and services that complement ours. We intend to continue developing such relationships wherever they support our marketing, growth and solution offering objectives.

The majority of our business is awarded through submission of formal competitive bids. Commercial bids are frequently negotiated as to terms and conditions such as schedule, specifications, delivery and payment. However, in government proposals, in most cases, the customer specifies the terms, conditions and form of the contract.

Our contracts and subcontracts are generally composed of a wide range of contract types including indefinite delivery/indefinite quantity ("IDIQ") and government-wide acquisition contracts (known as "GWACs") which are generally firm fixed-priced or time-and-materials contracts. For 2016, 2015, and 2014, the Company's revenue derived from firm fixed-price contracts was 76.0%, 77.0%, and 74.9%, respectively, cost plus contracts was 16.4%, 12.0%, and 15.4%, respectively, and time-and-material contracts was 7.6%, 11.0%, and 9.7%, respectively.

5

We derive substantially all of our revenues from contracts and subcontracts with the U.S. Government. Our revenues are generated from a number of contract vehicles and task orders. Over the past several years we have sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions and services provider. To that end, although we continue to offer resold products through our contract vehicles, we have focused on selling solutions and services and outsourcing product sales, as well as designing and delivering Telos manufactured technology products. In general, we believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed price development contracts.

Our  IT solutions primarily involve the design and integration of commercial off-the-shelf IT products into integrated solutions deliverables. Such equipment is generally available from several sources, although several factors including technical specifications, proprietary or brand-specific equipment requirements, or contractual channel agreements may limit the availability of sourcing options. We utilize more than 300 vendors as direct materials suppliers, subcontractors, and service providers. The vendors utilized in any given measurement period vary based on the mix and the timing of the solutions delivered, but typically our contracts are a smaller subset that comprises the majority of the direct cost of sales on an annual basis. Therefore, while a smaller subset of suppliers, subcontractors, and service providers may be employed to deliver the majority of the revenue for a particular period, were there to be an unforeseen disruption to one of these vendors, the delay would likely be short-term in nature due to the existence of alternate sourcing options.

We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:

	2016				2015				2014
					(dollar amounts in thousands)
Federal	$	130,415	96.7	%	$	117,328	97.3	%	$	122,549	96.1	%
State & Local, and Commercial		4,453	3.3	%		3,306	2.7	%		5,013	3.9	%
Total	$	134,868	100.0	%	$	120,634	100.0	%	$	127,562	100.0	%

We build market awareness of Telos and our solutions through a variety of marketing programs, including regular briefings with industry analysts, public relations activities, government relations initiatives, web seminars, trade show exhibitions, speaking engagements and web site marketing. When appropriate, we pursue joint marketing and selling efforts with our strategic partners.

Our People and Culture

As of December 31, 2016, we employed 502 people, which includes 52 from Teloworks, and 79 from Telos ID. Of our employees, 311 hold security clearances of secret or higher.

Our people are proficient in many fields such as computer science, information security and vulnerability testing, networking technologies, physics, engineering, operations research, mathematics, economics, and business administration. We place a high value on our people. As a result, we seek to remain competitive in terms of salary structures, incentive compensation programs, fringe benefits, opportunities for growth, and individual recognition and award programs.

Our management team is committed to maintaining a corporate culture that fosters mutual respect and job satisfaction for our people, while delivering innovation and value to customers and shareholders. This commitment is reflected in our core values.

Always with integrity, at Telos we:

Build trusted relationships,

Work hard together,

Design and deliver superior solutions, and

Have fun doing it.

These values are woven throughout the fabric of Telos. They are reflected in our hiring practices, reinforced regularly, and reviewed during appraisals. They are written into annual and quarterly objectives for staff and managers alike, as well as department and company business goals. Employees are encouraged to challenge themselves and each other to exhibit the core values in everyday activities.

Our employees also are given avenues of communication and interaction should they observe activities that are inconsistent with the Company's core values. Encouraged first to speak openly about any issues, a hotline provides an opportunity to express concerns anonymously.

We consider the foundational value of integrity to be a non-negotiable requirement of employment, and an expectation of suppliers, partners, and our customers. We guard our reputation and will take aggressive action to protect it. An essential part of our brand promise is that we always engage employees, customers, partners, suppliers, and investors with integrity.

6

Competition

We operate in a highly competitive marketplace. There are other companies that provide solutions similar to ours. Although these companies provide offerings that overlap with some of our solutions, we are not aware of any single company that provides competitive solutions in all of the areas where we compete. The companies that our solution areas compete with range from integrators that provide products and services such as Booz Allen Hamilton, General Dynamics, Lockheed Martin, Northrop Grumman, SAIC and Daon, to more software-specific organizations such as Agiliance and RSA Archer.

The majority of our business is in response to competitive requests from potential and current customers. Decisions regarding contract awards by our customers typically are based upon an assessment of the quality of our past performance, responsiveness to proposal requirements, uniqueness of the offering itself, price, and other competitive factors.

Aside from other companies that compete in our space, we sometimes face indirect competition from solutions that are developed "in-house" by some of our customers.

Government Contracts and Regulation

Our business is heavily regulated. We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. Government and other contracts. These laws and regulations, among other things: 

● impose specific and unique cost accounting practices that may differ from Generally Accepted Accounting Principles ("GAAP") in the United States of America and therefore require reconciliation;

● impose acquisition regulations that define reimbursable and non-reimbursable costs; and

● restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data.

Government contracts are subject to congressional funding. Consequently, at the outset of a program, a contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract. All of our customers have the right to terminate their contract with us at their convenience or in the event that we default.

A portion of our business is classified by the U.S. Government and cannot be specifically described. The operating results of these classified programs are included in our consolidated financial statements.

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. 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.

Funded backlog as of December 31, 2016 and 2015 was $59.7 million and $59.2 million, respectively.

While backlog remains a measurement consideration, in recent years we, as well as other U.S. Government contractors, experienced a material change in the manner in which the U.S. Government procures equipment and services. These procurement changes include the growth in the use of General Services Administration ("GSA") schedules which authorize agencies of the U.S. Government to purchase significant amounts of equipment and services. The use of the GSA schedules results in a significantly shorter and much more flexible procurement cycle, as well as increased competition with many companies holding such schedules. 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 such business. The use of GSA schedules and omnibus contracts, while generally not providing immediate backlog, provide areas of growth that we continue to aggressively pursue.

Seasonality

We derive substantially all of our revenue from U.S. Government contracting, and as such we are annually subject to the seasonality of the U.S. Government purchasing. As the U.S. Government fiscal year ends on September 30, it is not uncommon for U.S. Government agencies to award extra tasks in the weeks immediately prior to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. As a result of this cyclicality, we have historically experienced higher revenues in the third and fourth fiscal quarters, ending September 30 and December 31, respectively, with the pace of orders substantially reduced during the first and second fiscal quarters ending March 31 and June 30, respectively.

7

Item 1A. Risk Factors

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its businesses because these factors currently have, or may have, a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Form 10-K as a result of the risk factors discussed below and elsewhere in this Form 10-K.

Our inability to maintain sufficient access to the capital markets to provide the necessary capital to fund our operations would have a significant impact on our business.

Our primary sources of funds to meet our liquidity and capital requirements are an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA") and a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"). Under the Purchase Agreement, we may offer for sale, and RCA, in its sole discretion may purchase, up to $10 million of eligible accounts receivable relating to U.S. government prime contracts or subcontracts outstanding at any given time. Under the Financing Agreement, Action Capital agreed to provide advances of up to 90% of the net amount of certain acceptable customer accounts. The maximum outstanding principal amount of advances under the Financing Agreement is $5 million. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our accounts receivable under those agreements, the status of our business, global credit market conditions, or perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. In January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. If we are unable to maintain the Purchase Agreement and the Financing Agreement, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

We depend on the U.S. Government for a significant portion of our sales and a significant decline in U.S. Government defense spending could have an adverse impact on our financial condition and results of operations.

Our sales are highly concentrated with the U.S. Government. The customer relationship with the U.S. Government involves certain risks that are unique. The programs in which we participate must compete with other programs and policy imperatives during the budget and appropriations process.  In each of the past three years, substantially all of our net sales were to the U.S. Government, particularly the Department of Defense ("DoD"). U.S. defense spending has historically been cyclical. Defense budgets have received their strongest support when perceived threats to national security raise the level of concern over the country's safety. As these threats subside, spending on the military tends to decrease. Rising budget deficits, increasing national debt, the cost of the global war on terrorism, and increasing costs for entitlement programs continue to put pressure on all areas of discretionary spending, which could ultimately impact the defense budget.

In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the Budget Control Act of 2011 (the "BCA"), which established specific limits on annual appropriations for fiscal years 2012-2021. The BCA has been amended a number of times, most recently by the Bipartisan Budget Act of 2015 (the "BBA"). As a result, DoD funding levels have fluctuated over this period and have been difficult to predict. For example, the DoD budget was reduced by 7.8% in fiscal year 2013 as compared to fiscal year 2012, but  remained essentially flat for fiscal years 2014 and 2015. The BBA raised DoD fiscal year 2016 funding approximately 5% relative to fiscal year 2015, but the ultimate DoD funding for fiscal year 2017 remains uncertain because the DoD is currently operating under a Continuing Resolution for fiscal year 2017. The Continuing Resolution limits funding levels to fiscal year 2016 amounts and does not authorize new spending initiatives, despite renewed support in Washington for increased defense expenditures. Future spending levels are subject to a wide range of outcomes, depending on Congressional action.

In addition, for a number of years the U.S. government has been unable to complete its budget and appropriation process prior to the beginning of the next fiscal year, resulting in both actual or threatened governmental shut-downs and repeated use for extended time periods each year of Continuing Resolutions to fund the government. Such Continuing Resolutions, while they remain in effect, generally provide only prior-year funding levels for U.S. government agencies to continue operating, and greatly limit the ability of agencies to enter into new contracts. Additionally, while the BBA suspended the statutory debt limit through March 15, 2017, failure by the U.S. Government to further suspend or raise the limit once the Treasury Department exhausts its legal extraordinary measures to avoid breaching the limit in this and future years could result in the U.S. Government defaulting on its debts, with repercussions for the entire federal budget.

As a result of these and any other possible unforeseen factors, future U.S. Government defense spending levels are difficult to predict. Significant changes in defense spending or changes in U.S. Government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition or liquidity.

8

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

Substantially all of our U.S. government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect that this will continue to be the case. There is often significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:

● we may expend substantial funds and time to prepare bids and proposals for contracts that may ultimately be awarded to one of our competitors;

● we may be unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which could result in substantial cost overruns;

● we may encounter expense and delay if our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract. Additionally, the protest of contracts awarded to us may result in the delay of program performance and the generation of revenue while the protest is pending; and

● if we are not given the opportunity to re-compete for U.S. government contracts previously awarded to us, we may incur expenses to protect such decision and ultimately may not succeed in competing for or winning such contract renewal.

The U.S. government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these contract opportunities again until such contracts expire.

U.S. Government contracts generally are not fully funded at inception and are subject to amendment or termination, which places a significant portion of our revenues at risk and could adversely impact our earnings.

Our U.S. Government sales are funded by customer budgets, which operate on an October-to-September fiscal year. In February of each year, the President of the United States presents to the Congress the budget for the upcoming fiscal year. This budget proposes funding levels for every federal agency and is the result of months of policy and program reviews throughout the Executive branch. From February through September of each year, the appropriations and authorization committees of Congress review the President's budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies. There are two primary risks associated with this process. First, the process may be delayed or disrupted. Changes in congressional schedules, negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract. Second, funds for multi-year contracts can be changed in subsequent years in the appropriations process. In addition, the U.S. Government has increasingly relied on indefinite delivery, indefinite quantity ("IDIQ") contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in funding can impact the timing of available funds or can lead to changes in program content or termination at the government's convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on our future sales and earnings.

We are subject to substantial oversight from federal agencies that have the authority to suspend our ability to bid on contracts.

As a U.S. Government contractor, we are subject to oversight by many agencies and entities of the U.S. Government that may investigate and make inquiries of our business practices and conduct audits of contract performance and cost accounting. Depending on the results of any such audits and investigations, the U.S. Government may make claims against us. Under U.S. Government procurement regulations and practices, an indictment of a U.S. Government contractor could result in that contractor being fined and/or suspended for a period of time from eligibility for bidding on, or for the award of, new U.S. Government contracts. A conviction could result in debarment for a specified period of time. To the best of management's knowledge, there are no pending investigations, inquiries, claims or audits against the Company likely to have a material adverse effect on our business or our consolidated results of operations, cash flows or financial position.

We enter into fixed-price and other contracts that could subject us to losses if we experience cost growth that cannot be billed to customers.

          Generally, our customer contracts are either fixed-priced or cost reimbursable contracts. Under fixed-priced contracts, which represented approximately 76.0% of our 2016 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of the program can be highly variable, uncertain and difficult to estimate. Under cost reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or eliminated. Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns. Under both types of contracts, if we are unable to control costs or if our initial cost estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations.

9

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

We rely on subcontractors and other companies to provide raw materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally, we rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers. We depend on these subcontractors and vendors to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. If one or more of our subcontractors or suppliers is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services, our ability to perform our obligations as a prime contractor may be adversely affected.

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

Virtually all of the products that we produce and sell are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. The government market in which we primarily operate is characterized by rapidly changing technologies. The product and program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance in part depends on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices. In addition, because of the highly specialized nature of our business, we must be able to hire and retain the skilled and appropriately qualified personnel necessary to perform the services required by our customers. If we are unable to develop new products that meet customers' changing needs or successfully attract and retain qualified personnel, future sales and earnings may be adversely affected.

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

We operate in industry segments that are diverse. Based upon our current market analysis, there is no single company or small group of companies in a dominant competitive position. Some large competitors offer capabilities in a number of markets that overlap many of the same areas in which we offer services, while certain companies are focused upon only one or a few of such markets.  Some of the firms that compete with us in multiple areas include: Northrop Grumman, Lockheed Martin and General Dynamics. In addition, we compete with smaller specialty companies, including risk and compliance management companies, organizational messaging companies, and security consulting organizations, and companies that provide secure network offerings. If we do not compete effectively, we may suffer price reductions, reduced gross margins, and loss of market share.

Some of our security solutions have lengthy sales and implementation cycles, which could impact significantly our results of operations if projected orders are not realized.

We market the majority of our security solutions directly to U.S. Government customers. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources. This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. As a result, the sales and implementation cycles associated with certain of our services can be lengthy. Our quarterly and annual operating results could be materially harmed if orders forecasted for a specific customer for a particular quarter are not realized.

Our business could be negatively affected by cyber or other security threats or other disruptions.

As a U.S. defense contractor, we face cyber threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises. We routinely experience cyber security threats, threats to our information technology infrastructure and attempts to gain access to our sensitive information, as do our customers, suppliers, subcontractors and joint venture partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material impact on our financial results, and we believe our threat detection and mitigation processes and procedures are adequate. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures.  Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, our future financial results, or our reputation.

If we are unable to protect our intellectual property, our revenues may be impacted adversely by the unauthorized use of our products and services.

Our success depends on our internally developed technologies, patents and other intellectual property. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our trade secrets or other forms of intellectual property without authorization. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent U.S. law protects these rights in the United States. In addition, it is possible that others may independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer. In the future, we may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation, regardless of its outcome, could result in substantial costs and diversion of management and technical resources.

10

If we are unable to license third-party technology that is used in our products and services to perform key functions, the loss could have an adverse affect on our revenues.

The third-party technology licenses used by us may not continue to be available on commercially reasonable terms or at all. Our business could suffer if we lost the rights to use these technologies. A third-party could claim that the licensed software infringes a patent or other proprietary right. Litigation between the licensor and a third-party or between us and a third-party could lead to royalty obligations for which we are not indemnified or for which indemnification is insufficient, or we may not be able to obtain any additional license on commercially reasonable terms or at all. The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of new products or services until equivalent technology, if available, is identified, licensed and integrated. This could harm our business.

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

Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. As required by GAAP, we estimate loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. For a description of our current legal proceedings, see Note 13 – Commitments, Contingencies and Subsequent Events to the consolidated financial statements.

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

Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions, and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:

● diversion of management attention from running our existing business;

● possible material weaknesses in internal control over financial reporting;

● increased expenses including legal, administrative and compensation expenses related to newly hired or terminated employees;

● increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with us;

● potential exposure to material liabilities not discovered in the due diligence process;

● potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions; and

● unavailability of acquisition financing or unavailability of such financing on reasonable terms.

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease approximately 191,700 square feet of space for our corporate headquarters, integration facility, and primary service depot in Ashburn, Virginia. The lease expires in May 2029.

We sublease 27,000 square feet of space at the Ashburn, Virginia facility to our affiliate, Telos ID, which space serves as Telos ID's corporate headquarters. This sublease will expire on December 31, 2017.

We lease additional office space in five separate facilities located in California, Colorado, Maryland, New Jersey and Nevada under various leases expiring through January 2024.

We believe that the current space is substantially adequate to meet our operating requirements.

Item 3. Legal Proceedings

Information regarding legal proceedings may be found in Note 13 – Commitments, Contingencies and Subsequent Events to the Consolidated Financial Statements.

Item 4. Mine Safety Disclosures

Not applicable.

11

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

No public market exists for our Class A or Class B Common Stock. As of March 3, 2017, there were 206 record holders of our Class A Common Stock and 10 record holders of our Class B Common Stock. We have not paid dividends on either class of our Common Stock during the last two fiscal years. For a discussion of restrictions on our ability to pay dividends, see Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources and Note 6 – Current Liabilities and Debt Obligations to the Consolidated Financial Statements.

No public market exists for our Series A-1 and Series A-2 Redeemable Preferred Stock ("Senior Redeemable Preferred Stock").  See Note 7 – Redeemable Preferred Stock to the Consolidated Financial Statements.

Our 12% Cumulative Exchangeable Redeemable Preferred Stock ("Public Preferred Stock") trades over the OTC Bulletin Board and the OTCQB marketplace. See Note 7 – Redeemable Preferred Stock to the Consolidated Financial Statements.

As of December 31, 2016, there were 40,238,461 and 4,037,628 shares issued and outstanding of Class A and Class B Common Stock, respectively.

Item 6. Selected Financial Data

The following should be read in connection with the accompanying information presented in Item 7 and Item 8 of this Form 10-K.

OPERATING RESULTS

	Years Ended December 31,
	2016			2015			2014			2013			2012
	(amounts in thousands)
Sales	$	134,868		$	120,634		$	127,562		$	207,394		$	226,096
Operating income (loss)		2,112			(3,617	)		(11,644	)		6,111			17,700
(Loss) income before income taxes		(3,335	)		(9,237	)		(16,600	)		867			16,725
Net (loss) income attributable to Telos Corporation		(7,175	)		(15,940	)		(12,288	)		(2,618	)		7,435

FINANCIAL CONDITION

	As of December 31,
	2016		2015		2014		2013		2012
	(amounts in thousands)
Total assets	$	56,799	$	59,964	$	73,820	$	88,609	$	79,156
Senior credit facility, long-term (1)		----		7,144		8,590		19,141		18,559
Subordinated debt, long-term (1)		----		2,500		----		----		----
Capital lease obligations, long-term (2)		18,990		19,908		20,735		14,901		3,803
Deferred income taxes, long-term (3)		3,391		3,199		----		----		----
Senior redeemable preferred stock (4)		1,731		2,025		1,958		1,891		4,010
Public preferred stock (4)		127,742		123,919		120,097		116,274		112,451

(1)	See Note 6 to the Consolidated Financial Statements in Item 8 regarding our debt obligations.
(2)	See Note 10 to the Consolidated Financial Statements in Item 8 regarding our capital lease obligations.
(3)	See Note 9 to the Consolidated Financial Statements in Item 8 regarding our income taxes.
(4)	See Note 7 to the Consolidated Financial Statements in Item 8 regarding our redeemable preferred stock.

12

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

General

Our goal is to deliver superior IT solutions that meet or 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:

o Cyber Security – Solutions and services that assure the security of our customers' information, systems, and networks, including the Xacta IA Manager suite for IT governance, risk management, and compliance. Our information and cyber security consulting services include security assessments, digital forensics, and continuous compliance monitoring.

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

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

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

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of Public Preferred Stock.  Actual results could differ from those estimates.

        The following is a summary of the most critical accounting policies used in the preparation of our consolidated financial statements.

Revenue Recognition

Revenues are recognized in accordance with Financial Accounting Standards Board ("FASB") ASC 605-10-S99. We consider amounts earned upon evidence that an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. Additionally, revenues on arrangements requiring the delivery of more than one product or service are recognized in accordance with ASC 605-25, "Revenue Arrangements with Multiple Deliverables," which addresses and requires the separation and allocation at the inception of the arrangement of all deliverables based on their relative selling prices. This determination is made first by employing vendor-specific objective evidence ("VSOE"), to the extent it exists, then third-party evidence ("TPE") of selling price, to the extent that it exists. Given the nature of the deliverables contained in our multi-element arrangements, which often involve the design and/or delivery of complex or technical solutions to the government, we have not obtained TPE of selling prices on multi-element arrangements due to the significant differentiation which makes obtaining comparable pricing of products with similar functionality impractical. Therefore we do not utilize TPE. If VSOE and TPE are not determinable, we use our best estimate of selling price ("ESP") as defined in ASC 605-25, which represents our best estimate of the prices under the terms and conditions of a particular order for the various elements if they were sold on a stand-alone basis.

We recognize revenues for software arrangements upon persuasive evidence of an arrangement, delivery of the software, and determination that collection of a fixed or determinable license fee is probable. Revenues for software licenses sold on a subscription basis are recognized ratably over the related license period. For arrangements where the sale of software licenses are bundled with other products, including software products, upgrades and enhancements, post-contract customer support ("PCS"), and installation, the relative fair value of each element is determined based on VSOE. VSOE is defined by ASC 985-605, "Software Revenue Recognition," and is limited to the price charged when the element is sold separately or, if the element is not yet sold separately, the price set by management having the relevant authority. When VSOE exists for undelivered elements, the remaining consideration is allocated to delivered elements using the residual method. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (1) such VSOE does exist or (2) all elements of the arrangement are delivered. PCS revenues, upon being unbundled from a software license fee, are recognized ratably over the PCS period. Software arrangements requiring significant production, modification, or customization of the software are accounted for in accordance with ASC 605-35 "Construction-Type and Production-Type Contracts."

13

We may use subcontractors and suppliers in the course of performing contracts and under certain contracts we provide supplier procurement services and materials for our customers. Some of these arrangements may fall within the scope of ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent." We presume that revenues on our contracts are recognized on a gross basis, as we generally provide significant value-added services, assume credit risk, and reserve the right to select subcontractors and suppliers, but we evaluate the various criteria specified in the guidance in making the determination of whether revenue should be recognized on a gross or net basis.

A description of the business lines, the typical deliverables, and the revenue recognition criteria in general for such deliverables follows:

Cyber Operations and Defense – Our Cyber Operations and Defense business line consists of Cyber Security and Secure Mobility solutions areas.

Regarding our deliverables of Cyber Security (formerly Information Assurance) solutions, we provide Xacta IA Manager software and cybersecurity services to our customers. The software and accompanying services fall within the scope of ASC 985-605, "Software Revenue Recognition," as discussed above. We provide consulting services to our customers under either a FFP or T&M basis. Such contracts fall under the scope of ASC 605-10-S99. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones as appropriate under a particular contract, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract.

Regarding our deliverables of Secure Mobility (formerly Secure Networks) solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. The solutions within the Secure Mobility group are generally sold as firm-fixed price ("FFP") bundled solutions. Certain of these networking solutions involve contracts to design, develop, or modify complex electronic equipment configurations to a buyer's specification or to provide network engineering services, and as such fall within the scope of ASC 605-35. Revenue is earned upon percentage of completion based upon proportional performance, such performance generally being defined by performance milestones. Certain other solutions fall within the scope of ASC 605-10-S99, such as resold information technology products, like laptops, printers, networking equipment and peripherals, and ASC 605-25, such as delivery orders for multiple solutions deliverables. For product sales, revenue is recognized upon proof of acceptance by the customer, otherwise it is deferred until such time as the proof of acceptance is obtained. For example, in delivery orders for Department of Defense customers, which comprise the majority of the Company's customers, such acceptance is achieved with a signed Department of Defense Form DD-250 or electronic invoicing system equivalent. Services provided under these contracts are generally provided on a FFP basis, and as such fall within the scope of ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under time-and-materials ("T&M") services contracts based upon specified billing rates and other direct costs as incurred.

Identity Management (formerly Telos ID) – We provide our identity assurance and access management solutions and services and sell information technology products, such as computer laptops and specialized printers, and consumables, such as identity cards, to our customers. The solutions are generally sold as FFP bundled solutions, which would typically fall within the scope of ASC 605-25 and ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred.

IT & Enterprise Solutions (formerly Secure Communications) – We provide the Automated Message Handling System ("AMHS") as well as related services to our customers.  The system and accompanying services fall within the scope of ASC 985-605, as fully discussed above. Other services fall within the scope of ASC 605-10-S99 for arrangements that include only T&M contracts and ASC 605-25 for contracts with multiple deliverables such as T&M elements and FFP services. Under such arrangements, the T&M elements are established by direct costs. Revenue is recognized on T&M contracts according to specified rates as direct labor and other direct costs are incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred.

14

Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. In the event of a change in total estimated contract cost or profit, the cumulative effect of a change is recorded in the period the change in estimate occurs. To the extent contracts are incomplete at the end of an accounting period, revenue is recognized on the percentage-of-completion method, on a proportional performance basis, using costs incurred in relation to total estimated costs, or costs are deferred as appropriate under the terms of a particular contract. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding overhead and general and administrative expense, is recorded in the period in which the loss is first estimated.

Inventories

Inventories are stated at the lower of cost or net realizable value, where cost is determined primarily on the weighted average cost method. Inventories consist primarily of purchased customer off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. Inventories also include spare parts utilized to support certain maintenance contracts. Spare parts inventory is amortized on a straight-line basis over two to five years, which represents the shorter of the warranty period or estimated useful life of the asset. An allowance for obsolete, slow-moving or non-salable inventory is provided for all other inventory. This allowance is based on our overall obsolescence experience and our assessment of future inventory requirements.

Goodwill and other intangible assets

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

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, Cyber Operations and Defense ("CO&D"), Identity Management, and IT & Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows. In addition, the estimate of the total fair value of our reporting units 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, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair 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.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount is not recoverable. As of June 30, 2016, the other intangible assets had been fully amortized and no impairment charges had been taken.

Income Taxes

We account for income taxes in accordance with ASC 740-10, "Income Taxes." Under ASC 740-10, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income. We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

15

Results of Operations

We derive substantially all of our revenues from contracts and subcontracts with the U.S. Government. Our revenues are generated from a number of contract vehicles and task orders. Over the past several years we have sought to diversify and improve our operating margins through an evolution of our business from an emphasis on product reselling to that of an advanced solutions technologies provider. To that end, although we continue to offer resold products through our contract vehicles, we have focused on selling solutions and outsourcing product sales, as well as designing and delivering Telos manufactured and branded technologies.  We  believe our contract portfolio is characterized as having low to moderate financial risk due to the limited number of long-term fixed price development contracts. Our firm fixed-price activities consist principally of contracts for the products and services at established contract prices. Our time-and-material contracts generally allow the pass-through of allowable costs plus a profit margin.  For 2016, 2015, and 2014, the Company's revenue derived from firm fixed-price contracts was 76.0%, 77.0%, and 74.9%, respectively, cost plus contracts was 16.4%, 12.0%, and 15.4%, respectively, and time-and-material contracts was 7.6%, 11.0%, and 9.7%, respectively.

We 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 original NETCENTS contract was awarded in 2004 and has been modified 40 times since that time, including numerous modifications to extend the period of performance. The period of performance for the award of new task orders under the 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. As a result of the delays in the NETCENTS-2 procurement, some government orders that could have been issued through NETCENTS-2 have been issued through other contract vehicles, under which we were not prime contract awardees. This contributed to declines in revenues and margins below historical performance levels for 2014 and 2015. 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. A significant amount of the increase in revenue for 2016 is attributable to increased sales under NETCENTS-2. We have also been awarded other IDIQ/GWACs, including the Department of Homeland Security's EAGLE II and blanket purchase agreements under our GSA schedule. However, we have not been awarded significant delivery orders under EAGLE II due in part to government funding issues for the Department of Homeland Security.

On August 31, 2015, we were notified that we were not awarded the re-compete of a contract within our IT & Enterprise Solutions (formerly Secure Communications) area for a government agency. The contract had a total funded value of over $45 million over the prior three years and accounted for approximately 11% of revenue for 2016. We filed a protest of the award with the Court of Federal Claims, which entered a final order denying the protest on February 29, 2016. On March 4, 2016, we filed an appeal with the United States Court of Appeals for the Federal Circuit, appealing the decision of the Court of Federal Claims, and the appellate court affirmed the judgement of the lower court on December 13, 2016. We continued to perform under the contract through the period of performance, which ended on May 22, 2016.

On October 13, 2016, we were notified that we were not awarded the re-compete of a contract within our Cyber Operations & Defense area for a government agency that we had bid as part of a joint venture. The contract had a total funded value of over $22 million over the prior three years and accounted for approximately 6% of revenue for 2016. The joint venture filed a protest of the award to another bidder with the GAO on October 24, 2016, which denied the protest on February 2, 2017. The joint venture then filed a claim with United States Court of Federal Claims ("COFC") on February 10, 2017, together with a motion seeking to stay and enjoin the transition of the contract. The COFC denied the requests for injunctive relief on February 14, 2017, but initiated a one-month extension on the current contract so as to allow the Court to address the joint venture's protest, hold a hearing and issue a decision in advance of any final contract transition. The final hearing before the COFC is currently scheduled for April 13, 2017 and a decision from the COFC is anticipated on or before May 2, 2017. Absent an earlier ruling from the Court, we anticipate continuing to perform under the contract at least through the extended period of performance, which now is scheduled to end on May 2, 2017.

In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the Budget Control Act of 2011 (the "BCA"), which established specific limits on annual appropriations for fiscal years 2012-2021. The BCA has been amended a number of times, most recently by the Bipartisan Budget Act of 2015 (the "BBA"). As a result, DoD funding levels have fluctuated over this period and have been difficult to predict. For example, the DoD budget was reduced by 7.8% in fiscal year 2013 as compared to fiscal year 2012, but remained essentially flat for fiscal years 2014 and 2015. The BBA raised DoD fiscal year 2016 funding approximately 5% relative to fiscal year 2015, but the ultimate DoD funding for fiscal year 2017 remains uncertain because the DoD is currently operating under a Continuing Resolution for fiscal year 2017. The Continuing Resolution limits funding levels to fiscal year 2016 amounts and does not authorize new spending initiatives, despite renewed support in Washington for increased defense expenditures. Future spending levels are subject to a wide range of outcomes, depending on Congressional action.

16

Statement of Operations Data

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

	Years Ended December 31,
	2016					2015					2014
	(dollar amounts in thousands)
Revenue	$	134,868		100.0	%	$	120,634		100.0	%	$	127,562		100.0	%
Cost of sales		91,422		67.8			89,961		74.6			102,609		80.4
Selling, general and administrative expenses		41,334		30.6			34,290		28.4			36,597		28.7
Operating income (loss)		2,112		1.6			(3,617	)	(3.0	)		(11,644	)	(9.1	)
Other income (expenses):
Non-operating income		18		----			19		----			414		0.3
Interest expense		(5,465	)	(4.1	)		(5,639	)	(4.6	)		(5,370	)	(4.2	)
Loss before income taxes		(3,335	)	(2.5	)		(9,237	)	(7.6	)		(16,600	)	(13.0	)
(Provision) benefit for income taxes		(334	)	(0.2	)		(4,265	)	(3.5	)		5,988		4.7
Net loss		(3,669	)	(2.7	)		(13,502	)	(11.1	)		(10,612	)	(8.3	)
Less:  Net income attributable to non-controlling interest		(3,506	)	(2.6	)		(2,438	)	(2.0	)		(1,676	)	(1.3	)
Net loss attributable to Telos Corporation	$	(7,175	)	(5.3	)%	$	(15,940	)	(13.1	)%	$	(12,288	)	(9.6	)%

Years ended December 31, 2016, 2015, and 2014

Revenue.  Revenue increased by 11.8% to $134.9 million for 2016 from $120.6 million for 2015.  Such increase primarily consists of an increase in sales from the U.S. Air Force NETCENTS-2 contract. As discussed above, NETCENTS-2 is an IDIQ contract utilized by multiple government customers and sales under NETCENTS-2 varied from period to period according to the solution mix and timing of deliverables for a particular period. Services revenue increased by 15.6% to $112.9 million for 2016 from $97.7 million for 2015, primarily attributable to increases in sales of $11.7 million of Cyber Operations and Defense in Cyber Security solutions, $9.2 million of Cyber Operations and Defense in Secure Mobility solutions under several NETCENTS delivery orders for Telos-installed solutions, and $2.8 million of Identity Management solutions, offset by a decrease in sales of $8.5 million of IT & Enterprise solutions due to the loss of a contract as discussed above. The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables. Product revenue decreased by 4.3% to $22.0 million for 2016 from $23.0 million for 2015, primarily attributable to a decrease in sales of $2.3 million of Cyber Operations and Defense in Secure Mobility solutions in resold products and $0.4 million of IT & Enterprise solutions and, offset by increases in sales of $1.2 million of Identity Management solutions, and $0.5 million of proprietary software sales in Cyber Operations and Defense in Cyber Security solutions.

Revenue decreased by 5.4% to $120.6 million for 2015 from $127.6 million for 2014. Such decrease primarily consists of a decrease in sales from the U.S. Air Force NETCENTS contract as we have continued to fulfill orders on the contract however, as discussed above, no new orders were issued between September 2013 and May 2015. We were selected for an award on the NETCENTS replacement contract, NETCENTS-2 Network Operations and Infrastructure Solutions Small Business Companion, on April 3, 2015, but the contract was not opened for issuance of new orders until May 2015, so 2015 operating results do not include a full year of fulfillment of orders under the new contract. Services revenue decreased by 5.3% to $97.7 million for 2015 from $103.1 million for 2014, primarily attributable to decreases in sales of $6.1 million of Cyber Operations and Defense in Secure Mobility solutions under several NETCENTS delivery orders for Telos-installed solutions, $2.2 million of IT & Enterprise solutions, offset by an increase in sales of $1.9 million of Cyber Operations and Defense in Cyber Security solutions and $1.0 million of Identity Management solutions. 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 by 6.2% to $23.0 million for 2015 from $24.5 million for 2014, primarily attributable to a decrease in sales of $3.9 million of Secure Mobility solutions in resold products and $0.5 million of proprietary software sales in Cyber Operations and Defense in Cyber Security solutions, offset by increases in sales of $2.6 million of Identity Management solutions, and $0.3 million of IT & Enterprise solutions.

17

Cost of sales.  Cost of sales increased by 1.6% to $91.4 million for 2016 from $90.0 million for 2015 as a result of increases in revenue. Cost of sales for services increased by $4.5 million, and as a percentage of services revenue decreased by 6.1%, due to a change in the mix and nature of the programs including an increase in sales of certain Telos-installed solutions in Cyber Operations and Defense in Secure Mobility solutions under NETCENTS-2 and other contracts, as well as the loss of a contract in IT & Enterprise Solutions as discussed above. Cost of sales for product decreased by $3.0 million, primarily due to decreases in product revenue for resold product, and as a percentage of product revenue decreased by 10.5%, primarily due to improved resold product margins primarily in Telos ID. The increase in cost of sales is not necessarily indicative of a 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.

Cost of sales decreased by 12.3% to $90.0 million for 2015 from $102.6 million for 2014 as a result of decreases in revenue. Cost of sales for services decreased by $9.4 million, and as a percentage of services revenue decreased by 5.2%, due to a change in the mix and nature of the programs including an increase in sales of certain Telos-installed solutions in Cyber Operations and Defense in Secure Mobility solutions under NETCENTS. Cost of sales for product decreased by $3.2 million, primarily due to decreases in product revenue for resold product, and as a percentage of product revenue decreased by 8.7%, primarily due to improved resold product margins. The decrease in cost of sales 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.  Gross profit increased by 41.6% to $43.4 million for 2016 from $30.7 million for 2015. Gross margin increased to 32.2% for 2016 from 25.4% for 2015, due to various changes in the mix of contracts in all business lines, primarily increases in sales of Cyber Operations and Defense inCyber Security solutions.

Gross profit increased by 22.9% to $30.7 million for 2015 from $25.0 million for 2014. Gross margin increased to 25.4% for 2015 from 19.6% for 2014, due to various changes in the mix of contracts in all business lines, primarily increases in sales of Cyber Operations and Defense inCyber Security solutions.

Selling, general, and administrative expenses.  Selling, general, and administrative expenses increased 20.5% to $41.3 million for 2016 from $34.3 million for 2015. Such increase is primarily attributable to increases in bonuses of $4.1 million, labor costs of $2.6 million, and outside services of $1.5 million, offset by a decrease in amortization of other intangible assets of $1.1 million.

Selling, general, and administrative expenses decreased 6.3% to $34.3 million for 2015 from $36.6 million for 2014. Such decrease is primarily attributable to decreases in bonuses of $2.9 million, legal costs of $0.4 million, and travel costs of $0.2 million, offset by an increase in labor costs of $1.4 million.

Interest expense.  Interest expenses decreased 3.1% to $5.5 million for 2016 from $5.6 million for 2015, primarily due to a decrease in interest on senior credit facilities (as defined below).

Interest expenses increased 5.0% to $5.6 million for 2015 from $5.4 million for 2014, primarily due to increases in interest on the Ashburn lease and Porter Notes (as defined below), offset by a decrease in interest on the Facility (as defined below).

Components of interest expense are as follows:

	December 31,
	2016		2015		2014
	(amounts in thousands)
Commercial and subordinated note interest incurred	$	1,575	$	1,750	$	1,481
Preferred stock interest accrued		3,890		3,889		3,889
Total	$	5,465	$	5,639	$	5,370

Provision for income taxes.  Income tax provision was $0.3 million for 2016, compared to $4.3 million for 2015, primarily due to pretax loss of $3.3 million for 2016, compared to $9.2 million for 2015. Income tax provision was $4.3 million for 2015, compared to income tax benefit of $6.0 million for 2014, primarily due to pretax loss of $9.2 million for 2015, compared to $16.6 million for 2014, and an increase in valuation allowance of $7.2 million.

18

Liquidity and Capital Resources

As described in more detail below, we maintained a revolving credit facility (the "Facility") with Wells Fargo Capital Finance, Inc. ("Wells Fargo") until July 15, 2016. Borrowings under the Facility were collateralized by substantially all of our assets including inventory, equipment, and accounts receivable. The amount of available borrowings fluctuated based on the underlying asset-borrowing base, in general 85% of our trade accounts receivable, as adjusted by certain reserves (as further defined in the Facility agreement). The Facility provided us with virtually all of the liquidity we required to meet our operating, investing and financing needs prior to July 15, 2016.

On July 15, 2016, the outstanding balance under the Facility was paid in full. On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Additionally, on July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with 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 willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. If we are unable to maintain the new financing arrangements, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

RCA initially pays the Company 90% of U.S. Federal government receivables or 85% of certain commercial prime contractors. The remaining payment is deferred and based on the amount RCA receives from our customer, less a discount fee and a program access fee that is determined by the amount of time the receivable is outstanding before payment. The structure of the transaction provides for a true sale of the receivables transferred. Accordingly, upon transfer of the receivable to RCA, the receivable is removed from the Company's consolidated balance sheet, a loss on the sale is recorded and the residual amount remains a deferred payment as an account receivable until payment is received from RCA. The balance of the sold receivables may not exceed $10 million. During the year ended December 31, 2016, the Company sold approximately $35.3 million of receivables, and recognized a related loss of approximately $0.2 million in selling, general and administrative expenses for the same period. As of December 31, 2016, the balance of the sold receivables was approximately $1.0 million, and the related deferred price was approximately $0.1 million.

On July 15, 2016, Telos repaid the entire balance of the Facility utilizing proceeds generated through new financing arrangements with RCA and Action Capital, entered into concurrently with the payoff of the Facility, and terminated the Facility. At the time of the Facility repayment, the outstanding loan balance, including accrued interest and fees, was $5.4 million. Additionally, Wells Fargo required the Company to collateralize, by cash deposit, $0.3 million for an outstanding letter of credit and as general returned item collateral.  Under the terms of the payoff letter for the Facility, RCA paid $5.7 million directly to Wells Fargo with the Company receiving the residual amount from the sale of $7.4 million of Purchased Receivables to RCA.

Additionally, at the time of the Facility repayment, approximately $2.5 million of receivables were eligible to be financed through the Action Capital credit facility at the time of closing. The Company elected not to use this credit facility to effect the payoff, instead electing to finance the payoff through the RCA facility. Since receivables under the RCA facility are sold to RCA, current assets were utilized to pay off the Facility.

The Company utilizes the RCA and Action Capital facilities in concert to meet its operating, investing and financing cash flow requirements. The Company utilized the Action Capital facility shortly after the close of the financing transactions described above.

While the Company's decision to pay off a current liability (which was a noncurrent liability in the previous period) utilizing current assets (even though it had a noncurrent financing option for a substantial amount of the payoff available to it) had a negative effect on working capital at that time, the effect was mitigated through earnings from operations. The proceeds of the January 2017 financing discussed in Note 13 – Commitments, Contingencies, and Subsequent Events will be utilized to address working capital requirements and retire certain long-term obligations.

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.

19

Additionally, as a result of operations for 2014 and 2015, and the continued impact of contract delays as well as other government budgetary funding issues, management determined the need to raise additional working capital. Accordingly, in December 2014, we sold 10% of the membership interests in Telos ID to the Telos ID Class B member for $5 million, and, in March 2015, we issued subordinated notes in the amount of $2.5 million to affiliated entities of John R.C. Porter ("Porter Notes"), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. As discussed in detail in Note 13 – Commitments, Contingencies and Subsequent Events, in January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. Management currently believes that the Company's existing borrowing capacity is sufficient to fund our capital and liquidity needs for the next 12 months.

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

Our working capital was $(8.6) million and $1.1 million as of December 31, 2016 and 2015, respectively. See discussion above regarding the effect on working capital as of the balance sheet date of the subsequent origination of the RCA and Action Capital facilities and payoff of the Wells Fargo Facility. Although no assurances can be given, we expect that our financing arrangements with RCA and Action Capital, collectively, as well as the proceeds of the January 2017 financing discussed further in Note 13 – Commitments, Contingencies and Subsequent Events, are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Cash provided by operating activities was $13.9 million for the year ended December 31, 2016, compared to cash provided by operating activities of $2.7 million for the year ended December 31, 2015, and cash provided by operating activities of $6.2 million for 2014. Cash provided by operating activities is primarily driven by our operating income, the timing of receipt of customer payments, the timing of payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non cash items that do not impact cash flows from operating activities.  In 2016, net loss was $3.7 million, which included $0.3 million of income tax provision and $1.1 million of amortization of intangible assets resulting from the ITL acquisition. In 2015, net loss was $13.5 million, which included $4.3 million of income tax provision and $2.3 million of amortization of intangible assets resulting from the ITL acquisition. In 2014, net loss was $10.6 million, which included $6.0 million of income tax benefit and $2.3 million of amortization of intangible assets resulting from the ITL acquisition.

Cash used in investing activities for the year ended December 31, 2016, 2015, and 2014 was $0.6 million, $0.4 million, and $0.7 million, respectively, which consisted of the purchases of property and equipment.

Cash used in financing activities for year ended December 31, 2016 was $12.6 million, compared to $2.3 million for 2015, and $5.6 million for 2014. The financing activities in 2016 consisted primarily of net repayments of $6.7 million of the facilities, repayments of $3.2 million of a term loan, repayments of $0.8 million under capital leases, and distributions of $1.9 million to the Class B Member of Telos ID. The financing activities in 2015 consisted primarily of net repayments of $1.3 million from the Facility, repayments of $2.3 million of a term loan, proceeds of $2.5 million from subordinated debt, repayments of $0.8 million under capital leases, proceeds of $2.0 million from sale of 10% of Telos ID membership interest, distributions of $2.4 million to the Class B Member of Telos ID. The financing activities in 2014 consisted primarily of net repayments of $7.2 million from the Facility, repayments of $0.8 million under capital leases, repayments of a $0.7 million of a term loan, distributions of $1.5 million to the Class B Member of Telos ID, proceeds of $1.7 million from the assignment of the purchase option under our 2013 lease on our Ashburn headquarters, and proceeds of $3.0 million from sale of 10% of Telos ID membership interest.

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

Accounts Receivable Purchase Agreement

On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the "Maximum Amount") at any given time. The Purchase Agreement has an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA.

20

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. government, and 85% if the account debtor is not an agency of the U.S. government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that the Purchased Receivable is outstanding; (iii) a commitment fee equal to 1% per annum of Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements. At the time the Purchase Agreement was signed, the Company received proceeds in an amount equal to $6.3 million, net of an initial enrollment fee equal to $25,000. Those proceeds were used to repay the outstanding amount under the Facility to Wells Fargo.

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

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

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

Financing and Security Agreement

On July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The maximum outstanding principal amount of advances under the Financing Agreement was $2.5 million, which was subsequently increased to $5 million on September 6, 2016. The Financing Agreement has a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. At the time the Financing Agreement was signed, the Company did not borrow any amounts under the Financing Agreement.

The Company shall pay Action Capital interest on the advances outstanding under the Financing Agreement at a rate equal to the prime rate of Wells Fargo Bank, N.A. in effect on the last business day of the prior month plus 2%, and a monthly fee equal to 0.50%. All interest calculations are based on a year of 360 days. The Company's obligations under the Financing Agreement are secured by certain assets of the Company pertaining to the Acceptable Accounts, including all accounts, accounts receivable, earned and unbilled revenue, contract rights, chattel paper, documents, instruments, general intangibles, reserves, reserve accounts, rebates, books and records, and all proceeds of the foregoing.

Pursuant to the terms of the Financing Agreement, Action Capital shall have full recourse against the Company when an Acceptable Account is not paid in full by the respective customer within 90 days of the date of purchase or if for any reason it ceases to be an Acceptable Account, including the right to charge-back any such Acceptable Account. It is considered an event of default if the Company breaches any covenant or warranty, knowingly provides false or incorrect material information to Action Capital, or otherwise defaults on any of its material obligations under the Financing Agreement or any other material agreements with Action Capital (subject to a cure period). If any such events of default occur, then Action Capital may take certain actions, including declaring any indebtedness immediately due and payable, requiring any customers with Acceptable Accounts to make payments directly to Action Capital, exercising its power of attorney from the Company to take actions in the Company's stead with respect to any of Company's Acceptable Accounts, or terminating the Financing Agreement.

As of December 31, 2016, there were no outstanding borrowings under the Financing Agreement.

21

In connection with the Purchase Agreement and the Financing Agreement, we terminated the Facility with Wells Fargo, effective as of July 15, 2016, prior to its maturity date of April 1, 2017, and repaid all amounts outstanding under the Facility; other than (1) the obligations of the Company under the Facility and related loan documents with respect to letters of credits and fees, charges, costs and expenses related thereto, (2) the obligations of the Company under the Facility and related loan documents to reimburse Wells Fargo for costs and expenses that may become due and payable after the date of the termination of the Facility, and (3) any customary contingent indemnification obligations. The Company paid an early termination fee of $100,000, and no other early termination fees or prepayment penalties were incurred by the Company in connection with the termination of the Facility.

Senior Revolving Credit Facility

On August 12, 2015, we amended our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to July 1, 2016. On November 17, 2015, the Facility was further amended to extend the maturity date to October 1, 2016. As of December 31, 2015, we were in compliance with the Facility's financial covenants, including EBITDA covenants.

As of December 31, 2015, the interest rate on the Facility was 5.75%. We incurred interest expense in the amount of $0.2 million, $0.6 million, and $0.7 million for the years ended December 31, 2016, 2015, and 2014, respectively, on the Facility.

On March 30, 2016 the Facility was amended ("the Seventeenth Amendment") to extend the maturity date to January 1, 2017. The Seventeenth Amendment also amended the terms of the Facility, reducing the total credit available from $20 million to $10 million effective as of the date of the amendment, which more appropriately reflected the Company's projected utilization of the Facility. The Seventeenth Amendment fixed the interest rate at the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. The Seventeenth Amendment also increased the minimum excess availability requirement under the revolving component from $1.25 million to $2.0 million, effective as of the date of the amendment, and increased the requirement to $2.5 million, effective July 1, 2016, and $3.0 million, effective November 1, 2016, if the Company did not receive $5 million of equity or subordinated debt investment by June 1, 2016. If such capital investment was not received by June 1, 2016, we would pay a fee of $100,000 to Wells Fargo, which was paid in June 2016. In consideration for the closing of the Seventeenth Amendment, we paid Wells Fargo a fee of $100,000, plus expenses related to the closing.

On May 16, 2016, the Facility was amended to extend the maturity date to April 1, 2017.

At December 31, 2015, we had outstanding borrowings of $8.5 million on the Facility, which included the $3.2 million term loan, of which $1.4 million was short-term. At December 31, 2015, we had unused borrowing availability on the Facility of $5.8 million. The effective weighted average interest rate on the outstanding borrowings under the Facility was 6.7% for the year ended December 31, 2015.

On July 15, 2016, the outstanding balance under the Facility was paid in full.

Subordinated Debt

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter"). Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the "Subordination Agreements") with Porter and Wells Fargo, in which the Porter Notes are fully subordinated to the Facility and any subsequent senior lenders (including Action Capital), and payments under the Porter Notes are permitted only if certain conditions are met. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 for the years ended December 31, 2016 and 2015, respectively, on the Porter Notes. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.

22

Redeemable Preferred Stock

We currently have two primary classes of redeemable preferred stock - Senior Redeemable Preferred Stock and Public Preferred Stock.  These classes of stock carry cumulative dividend rates of 14.125% and 12%, respectively. We accrue dividends on both classes of redeemable preferred stock and provide for accretion related to the Public Preferred Stock. As of December 31, 2008, the Public Preferred Stock has been fully accreted. The total carrying amount of redeemable preferred stock, including accumulated and unpaid dividends was $129.8 million and $125.9 million at December 31, 2016 and 2015, respectively. We recorded dividends of $3.9 million each for the years ended December 31, 2016, 2015, and 2014, on the two classes of redeemable preferred stock, and such amounts have been included in interest expense.

Senior Redeemable Preferred Stock

The Senior Redeemable Preferred Stock is senior to all other outstanding equity of the Company, including the Public Preferred Stock. The Series A-1 ranks on a parity with the Series A-2. The components of the authorized Senior Redeemable Preferred Stock are 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred Stock, each with $.01 par value. The Senior Redeemable Preferred Stock carries a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share. The dividends are payable semiannually on June 30 and December 31 of each year. We have not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013. The liquidation preference of the Senior Redeemable Preferred Stock is the face amount of the Series A-1 and A-2 ($1,000 per share), plus all accrued and unpaid dividends.

Due to the terms of the Facility, the Porter Notes, other senior obligations currently or previously in existence, the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we have been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013. Certain holders of the Senior Redeemable Preferred Stock have entered into standby agreements whereby, among other things, those holders will not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended. As a result of such standby agreements, as of December 31, 2016, instruments held by Toxford Corporation ("Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on May 31, 2018.

At December 31, 2016 and 2015, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 197 shares and 276 shares for Series A-1 and Series A-2, respectively. Due to the limitations, contractual restrictions, and agreements described above, the Senior Redeemable Preferred Stock is classified as noncurrent as of December 31, 2016.

At December 31, 2016 and 2015, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.6 million. We accrued dividends on the Senior Redeemable Preferred Stock of $67,000 for each of the years ended December 31, 2016, 2015, and 2014, which were reported as interest expense. Prior to the effective date of ASC 480-10, "Distinguishing Liabilities from Equity," on July 1, 2003, such dividends were charged to stockholders' deficit.

Public Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006.  The Public Preferred Stock was fully accreted as of December 2008.  We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2016 and 2015, was 3,185,586. The Public Preferred Stock is quoted as TLSRP on the OTCQB marketplace and the OTC Bulletin Board.

 Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the Facility and the Porter Notes to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments continue to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Facility and the Porter Notes, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the consolidated balance sheets as of December 31, 2016 and 2015.

23

Until July 15, 2016, we were parties with certain of our subsidiaries to the Facility agreement with Wells Fargo. Under the Facility, we agreed that, so long as any credit under the Facility is available and until full and final payment of the obligations under the Facility, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. The Porter Notes and the Senior Redeemable Preferred Stock prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms also cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization payments with respect to the Public Preferred Stock. Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from December 31, 2016.  This classification is consistent with ASC 210-10, "Balance Sheet" and 470-10, "Debt" and the FASB ASC Master Glossary definition of "Current Liabilities."

ASC 210-10 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470-10 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

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

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $95.9 million and $92.1 million as of December 31, 2016 and 2015, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for each of the years ended December 31, 2016, 2015, and 2014, which was recorded as interest expense. Prior to the effective date of ASC 480-10 on July 1, 2003, such dividends were charged to stockholders' accumulated deficit.

24

Contractual Obligations

The following summarizes our contractual obligations and our redeemable preferred stock at December 31, 2016 (in thousands):

			Payments due by Period
	Total		2017			2018 - 2020		2021 - 2023	2024 and later
Capital lease obligations (1)	$	27,251	$	1,900	$	5,987	$	6,448	$	12,916
Subordinated debt (2)		3,029		3,029		----		----		----
Operating lease obligations		3,268		560		1,487		1,193		28
	$	33,548	$	5,489	$	7,474	$	7,641	$	12,944
Senior preferred stock (3)	$	2,092
Public preferred stock (4)		127,742
	$	129,834
Total	$	163,382
(1)   Includes interest expense:	$	7,343	$	982	$	2,637	$	2,057	$	1,667

(2)   Amount represents the carrying value as of December 31, 2016, includes interest accrual of $0.5 million, is due and payable in full on July 1, 2017.

(3)   In accordance with ASC 480, the senior preferred stock was reclassified from equity to liability in July 2003.  Amount represents the carrying value as of December 31, 2016, and includes accrual of accumulated dividends of $1.6 million.  Payment of such amount presumes conditions precedent being satisfied (See Note 7 – Redeemable Preferred Stock) and as such, redemption date is unknown and accordingly payment is not reflected in a particular period. Amount does not reflect additional dividends through the redemption date as such date is unknown. Such additional dividends accrue annually in the amount of $67,000.

(4)   In accordance with ASC 480, the public preferred stock was reclassified from equity to liability in July 2003.  Amount represents the carrying value as of December 31, 2016, and includes accrual of accumulated dividends and accretion of $121.4 million.  Payment of such amount presumes conditions precedent being satisfied (See Note 7 – Redeemable Preferred Stock) and as such, redemption date is unknown and accordingly payment is not reflected in a particular period. Amount does not reflect additional dividends and accretion through the redemption date as such date is unknown. Such additional dividends accrue annually in the amount of $3.8 million. Such accretion has been fully accreted as of December 31, 2008.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (as defined in Item 303, paragraph (a)(4)(ii) of Regulation S-K) that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Expenditures

Capital expenditures for property and equipment were $0.6 million, $0.4 million, and $0.7 million for 2016, 2015, and 2014, respectively. We presently anticipate capital expenditures of approximately $2.0 million in 2017; however, there can be no assurance that this level of capital expenditures will occur. We believe that available cash and borrowings under the Purchase Agreement and Financing Agreement will be sufficient to generate adequate amounts of cash to fund our projected capital expenditures for 2017.

Capital Leases and Related Obligations

We have various lease agreements for property and equipment that, pursuant to ASC 840, require us to record the present value of the minimum lease payments for such equipment and property as an asset in our consolidated financial statements. Such assets are amortized on a straight-line basis over the term of the related lease or their useful life, whichever is shorter.

Inflation

The rate of inflation has been moderate over the past five years and, accordingly, has not had a significant impact on the Company. We have generally been able to pass through any increased costs to customers through higher prices to the extent permitted by competitive pressures.

Recent Accounting Pronouncements

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Until July 15, 2016, we were exposed to interest rate volatility with regard to our variable rate debt obligations under the Facility. The effective weighted average interest rate on the outstanding borrowings under the Facility was 6.7% for the year ended December 31, 2015.

25

Item 8. Consolidated Financial Statements and Supplementary Data

TELOS CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Report of Independent Registered Public Accounting Firm	27
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014	28
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, 2015 and 2014	29
Consolidated Balance Sheets as of December 31, 2016 and 2015	30 - 31
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014	32 - 33
Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2016, 2015, and 2014	34
Notes to Consolidated Financial Statements	35 – 56

26

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Telos Corporation

Ashburn, Virginia

We have audited the accompanying consolidated balance sheets of Telos Corporation and Subsidiaries (the "Company") as of December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive loss, changes in stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2016.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telos Corporation and Subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

McLean, Virginia

March 30, 2017

27

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands)

	Years Ended December 31,
	2016			2015			2014
Revenue (Note 5)
Services	$	112,881		$	97,659		$	103,071
Products		21,987			22,975			24,491
		134,868			120,634			127,562
Costs and expenses
Cost of sales – Services		77,578			73,079			82,481
Cost of sales – Products		13,844			16,882			20,128
		91,422			89,961			102,609
Selling, general and administrative expenses		41,334			34,290			36,597
Operating income (loss)		2,112			(3,617	)		(11,644	)
Other income (expenses)
Non-operating income		18			19			414
Interest expense		(5,465	)		(5,639	)		(5,370	)
Loss before income taxes		(3,335	)		(9,237	)		(16,600	)
(Provision) benefit for income taxes (Note 9)		(334	)		(4,265	)		5,988
Net loss		(3,669	)		(13,502	)		(10,612	)
Less: Net income attributable to non-controlling interest (Note 2)		(3,506	)		(2,438	)		(1,676	)
Net loss attributable to Telos Corporation	$	(7,175	)	$	(15,940	)	$	(12,288	)

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

28

TELOS CORPORATION AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 (amounts in thousands)

	Years Ended December 31,
	2016			2015			2014
Net loss	$	(3,669	)	$	(13,502	)	$	(10,612	)
Other comprehensive loss:
Foreign currency translation adjustments		(12	)		(6	)		(3	)
Actuarial loss on pension liability adjustments, net of tax		--			(2	)		--
Total other comprehensive loss, net of tax		(12	)		(8	)		(3	)
Comprehensive income attributable to non-controlling interest		(3,506	)		(2,438	)		(1,676	)
Comprehensive loss attributable to Telos Corporation	$	(7,187	)	$	(15,948	)	$	(12,291	)

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

29

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

ASSETS

	December 31,
	2016			2015
Current assets (Note 6)
Cash and cash equivalents	$	659		$	58
Accounts receivable, net of reserve of $429 and $485, respectively (Note 5)		19,087			19,045
Inventories, net of obsolescence reserve of $1,672 and $1,457, respectively		3,552			2,901
Deferred program expenses		186			734
Other current assets		1,521			3,105
Total current assets		25,005			25,843
Property and equipment (Note 6)
Furniture and equipment		6,912			7,381
Leasehold improvements		2,399			2,418
Property and equipment under capital leases		30,829			30,829
		40,140			40,628
Accumulated depreciation and amortization		(24,023	)		(23,366	)
		16,117			17,262
Goodwill (Note 3)		14,916			14,916
Other intangible assets (Note 3)		--			1,129
Other assets (Note 6)		761			814
Total assets	$	56,799		$	59,964

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

30

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

LIABILITIES, REDEEMABLE PREFERRED STOCK,

AND STOCKHOLDERS' DEFICIT

	December 31,
	2016			2015
Current liabilities
Accounts payable and other accrued payables (Note 6)	$	15,317		$	12,678
Accrued compensation and benefits		8,071			4,755
Deferred revenue		4,900			3,466
Senior credit facility – short-term (Note 6)		--			1,400
Subordinated debt – short-term (Note 5)		3,029			--
Capital lease obligations – short-term (Note 10)		918			827
Other current liabilities		1,406			1,644
Total current liabilities		33,641			24,770
Senior revolving credit facility (Note 6)		--			7,144
Subordinated debt (Note 6)		--			2,500
Capital lease obligations (Note 10)		18,990			19,908
Deferred income taxes (Note 9)		3,391			3,199
Senior redeemable preferred stock (Note 7)		2,092			2,025
Public preferred stock (Note 7)		127,742			123,919
Other liabilities (Note 9)		919			882
Total liabilities		186,775			184,347
Commitments, contingencies and subsequent events (Notes 10 and 13)
Stockholders' deficit (Note 8)
Telos stockholders' deficit
Class A common stock, no par value, 50,000,000 shares authorized, 40,238,461 shares issued and outstanding		65			65
Class B common stock, no par value, 5,000,000 shares authorized, 4,037,628 shares issued and outstanding		13			13
Additional paid-in capital		3,229			3,229
Accumulated other comprehensive income		25			37
Accumulated deficit		(135,537	)		(128,362	)
Total Telos stockholders' deficit		(132,205	)		(125,018	)
Non-controlling interest in subsidiary (Note 2)		2,229			635
Total stockholders' deficit		(129,976	)		(124,383	)
Total liabilities, redeemable preferred stock, and stockholders' deficit	$	56,799		$	59,964

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

31

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

	Years Ended December 31,
	2016			2015			2014
Operating activities:
Net loss	$	(3,669	)	$	(13,502	)	$	(10,612	)
Adjustments to reconcile net loss to cash provided by operating activities:
Stock-based compensation		--			--			12
Dividends of preferred stock as interest expense		3,890			3,889			3,890
Depreciation and amortization		2,898			4,291			4,251
Provision for inventory obsolescence		215			92			1,359
(Benefit) provision for doubtful accounts receivable		(56	)		113			51
Amortization of debt issuance costs		65			152			36
Deferred income tax provision (benefit)		192			5,113			(4,035	)
Loss on disposal of fixed asssets		--			11			56
Changes in assets and liabilities:
Decrease in accounts receivable		14			3,364			23,059
(Increase) decrease in inventories		(866	)		352			181
Decrease (increase) in deferred program expenses		548			657			(815	)
Decrease (increase) in other current assets and other assets		1,824			1,330			(3,192	)
Increase (decrease) in accounts payable and other accrued payables		3,722			(3,840	)		(6,490	)
Increase (decrease) in accrued compensation and benefits		3,316			552			(1,738	)
Increase in deferred revenue		1,434			122			576
Increase (decrease) in other current liabilities and other liabilities		328			27			(405	)
Cash provided by operating activities		13,855			2,723			6,184
Investing activities:
Purchases of property and equipment		(624	)		(394	)		(665	)
Cash used in investing activities		(624	)		(394	)		(665	)
Financing activities:
Proceeds from senior credit facilities		70,032			139,072			163,112
Repayments of senior credit facilities		(75,640	)		(139,118	)		(171,363	)
Repayments of term loan		(3,200	)		(2,300	)		(688	)
(Decrease) increase in book overdrafts		(1,083	)		(1,298	)		1,016
Proceeds from subordinated debt		--			2,500			--
Proceeds from assignment of purchase option under lease		--			--			1,669
Payments under capital lease obligations		(827	)		(772	)		(779	)
Proceeds from sale of Telos ID 10% membership interest		--			2,000			3,000
Distributions to Telos ID Class B member – non-controlling interest		(1,912	)		(2,387	)		(1,548	)
Cash used in financing activities		(12,630	)		(2,303	)		(5,581	)
Increase (decrease) in cash and cash equivalents		601			26			(62	)
Cash and cash equivalents, beginning of the year		58			32			94
Cash and cash equivalents, end of year	$	659		$	58		$	32

32

	Years Ended December 31,
	2016		2015		2014
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	1,320	$	1,523	$	1,497
Income taxes	$	60	$	65	$	879
Noncash:
Interest on redeemable preferred stock	$	3,890	$	3,889	$	3,890
Financing of capital leases	$	--	$	--	$	5,680
Receivable from sale of Telos ID 10% membership interest	$	--	$	--	$	2,000

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

33

TELOS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

(amounts in thousands)

	Telos Corporation
	Class A Common Stock		Class B Common Stock		Additional Paid–in Capital		Accumulated Other Comprehen-sive Income			Accumulated Deficit			Non-Controlling Interest			Total Stockholders' Deficit
Balance December 31, 2013	$	65	$	13	$	146	$	48		$	(100,134	)	$	454		$	(99,408	)
Net (loss) income		--		--		--		--			(12,288	)		1,676			(10,612	)
Sale of Telos ID membership interest		--		--		3,071		--			--			2			3,073
Foreign currency translation loss		--		--		--		(3	)		--			--			(3	)
Stock-based compensation		--		--		12		--			--			--			12
Distributions		--		--		--		--			--			(1,548	)		(1,548	)
Balance December 31, 2014	$	65	$	13	$	3,229	$	45		$	(112,422	)	$	584		$	(108,486	)
Net (loss) income		--		--		--		--			(15,940	)		2,438			(13,502	)
Foreign currency translation loss		--		--		--		(6	)		--			--			(6	)
Pension liability adjustments		--		--		--		(2	)		--			--			(2	)
Distributions		--		--		--		--			--			(2,387	)		(2,387	)
Balance December 31, 2015	$	65	$	13	$	3,229	$	37		$	(128,362	)	$	635		$	(124,383	)
Net (loss) income		--		--		--		--			(7,175	)		3,506			(3,669	)
Foreign currency translation loss		--		--		--		(12	)		--			--			(12	)
Distributions		--		--		--		--			--			(1,912	)		(1,912	)
Balance December 31, 2016	$	65	$	13	$	3,229	$	25		$	(135,537	)	$	2,229		$	(129,976	)

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

34

TELOS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Business and Organization

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. We own all of the issued and outstanding share capital of Xacta Corporation, a subsidiary that develops, markets and sells government-validated secure enterprise solutions to government and commercial customers. We also own all of the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation. We also have a 50% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID") and a 100% ownership interest in Teloworks, Inc. ("Teloworks").

Principles of Consolidation and Basis of Presentation

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

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

Use of Estimates

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of Public Preferred Stock. Actual results could differ from those estimates.

Revenue Recognition

Revenues are recognized in accordance with FASB ASC 605-10-S99. We consider amounts earned upon evidence that an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. Additionally, revenues on arrangements requiring the delivery of more than one product or service are recognized in accordance with ASC 605-25, "Revenue Arrangements with Multiple Deliverables," which addresses and requires the separation and allocation at the inception of the arrangement of all deliverables based on their relative selling prices. This determination is made first by employing vendor-specific objective evidence ("VSOE"), to the extent it exists, then third-party evidence ("TPE") of selling price, to the extent that it exists. Given the nature of the deliverables contained in our multi-element arrangements, which often involve the design and/or delivery of complex or technical solutions to the government, we have not obtained TPE of selling prices on multi-element arrangements due to the significant differentiation which makes obtaining comparable pricing of products with similar functionality impractical. Therefore we do not utilize TPE.  If VSOE and TPE are not determinable, we use our best estimate of selling price ("ESP") as defined in ASC 605-25, which represents our best estimate of the prices under the terms and conditions of a particular order for the various elements if they were sold on a stand-alone basis.

We recognize revenues for software arrangements upon persuasive evidence of an arrangement, delivery of the software, and determination that collection of a fixed or determinable license fee is probable. Revenues for software licenses sold on a subscription basis are recognized ratably over the related license period. For arrangements where the sale of software licenses are bundled with other products, including software products, upgrades and enhancements, post-contract customer support ("PCS"), and installation, the relative fair value of each element is determined based on VSOE. VSOE is defined by ASC 985-605, "Software Revenue Recognition," and is limited to the price charged when the element is sold separately or, if the element is not yet sold separately, the price set by management having the relevant authority. When VSOE exists for undelivered elements, the remaining consideration is allocated to delivered elements using the residual method. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (1) such VSOE does exist or (2) all elements of the arrangement are delivered. PCS revenues, upon being unbundled from a software license fee, are recognized ratably over the PCS period. Software arrangements requiring significant production, modification, or customization of the software are accounted for in accordance with ASC 605-35 "Construction-Type and Production-Type Contracts."

35

We may use subcontractors and suppliers in the course of performing contracts and under certain contracts we provide supplier procurement services and materials for our customers. Some of these arrangements may fall within the scope of ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent." We presume that revenues on our contracts are recognized on a gross basis, as we generally provide significant value-added services, assume credit risk, and reserve the right to select subcontractors and suppliers, but we evaluate the various criteria specified in the guidance in making the determination of whether revenue should be recognized on a gross or net basis.

A description of the business lines, the typical deliverables, and the revenue recognition criteria in general for such deliverables follows:

Cyber Operations and Defense – Our Cyber Operations and Defense business line consists of Cyber Security and Secure Mobility solutions areas.

Regarding our deliverables of Cyber Security (formerly Information Assurance) solutions, we provide Xacta IA Manager software and cybersecurity services to our customers. The software and accompanying services fall within the scope of ASC 985-605, "Software Revenue Recognition," as discussed above. We provide consulting services to our customers under either a FFP or T&M basis. Such contracts fall under the scope of ASC 605-10-S99. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones as appropriate under a particular contract, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract.

Regarding our deliverables of Secure Mobility (formerly Secure Networks) solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. The solutions within the Secure Mobility group are generally sold as firm-fixed price ("FFP") bundled solutions. Certain of these networking solutions involve contracts to design, develop, or modify complex electronic equipment configurations to a buyer's specification or to provide network engineering services, and as such fall within the scope of ASC 605-35. Revenue is earned upon percentage of completion based upon proportional performance, such performance generally being defined by performance milestones. Certain other solutions fall within the scope of ASC 605-10-S99, such as resold information technology products, like laptops, printers, networking equipment and peripherals, and ASC 605-25, such as delivery orders for multiple solutions deliverables. For product sales, revenue is recognized upon proof of acceptance by the customer, otherwise it is deferred until such time as the proof of acceptance is obtained. For example, in delivery orders for Department of Defense customers, which comprise the majority of the Company's customers, such acceptance is achieved with a signed Department of Defense Form DD-250 or electronic invoicing system equivalent. Services provided under these contracts are generally provided on a FFP basis, and as such fall within the scope of ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under time-and-materials ("T&M") services contracts based upon specified billing rates and other direct costs as incurred.

Identity Management (formerly Telos ID) – We provide our identity assurance and access management solutions and services and sell information technology products, such as computer laptops and specialized printers, and consumables, such as identity cards, to our customers. The solutions are generally sold as FFP bundled solutions, which would typically fall within the scope of ASC 605-25 and ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred.

IT & Enterprise Solutions (formerly Secure Communications) – We provide the Automated Message Handling System ("AMHS") as well as related services to our customers. The system and accompanying services fall within the scope of ASC 985-605, as fully discussed above. Other services fall within the scope of ASC 605-10-S99 for arrangements that include only T&M contracts and ASC 605-25 for contracts with multiple deliverables such as T&M elements and FFP services.  Under such arrangements, the T&M elements are established by direct costs. Revenue is recognized on T&M contracts according to specified rates as direct labor and other direct costs are incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred.

36

Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. In the event of a change in total estimated contract cost or profit, the cumulative effect of a change is recorded in the period the change in estimate occurs. To the extent contracts are incomplete at the end of an accounting period, revenue is recognized on the percentage-of-completion method, on a proportional performance basis, using costs incurred in relation to total estimated costs, or costs are deferred as appropriate under the terms of a particular contract. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding overhead and general and administrative expense, is recorded in the period in which the loss is first estimated.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our cash management program utilizes zero balance accounts. Accordingly, all book overdraft balances have been reclassified to accounts payable and other accrued payables, to the extent that availability of funds exists on our revolving credit facility.

Accounts Receivable

Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon managements' 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.

Inventories

Inventories are stated at the lower of cost or net realizable value, where cost is determined on the weighted average method. Substantially all inventories consist of purchased customer 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 is $5.2 million and $4.4 million at December 31, 2016 and 2015, respectively.  As of December 31, 2016, it is management's judgment that we have fully provided for any potential inventory obsolescence.

The components of the allowance for inventory obsolescence are set forth below (in thousands):

	Balance Beginning of Year		Additions Charge to Costs and Expense		Recoveries			Balance End of Year
Year Ended December 31, 2016	$	1,457	$	215	$	--		$	1,672
Year Ended December 31, 2015	$	1,366	$	92	$	(1	)	$	1,457
Year Ended December 31, 2014	$	417	$	1,359	$	(410	)	$	1,366

Property and Equipment

        Property and equipment is recorded at cost. Depreciation is provided on the straight-line method at rates based on the estimated useful lives of the individual assets or classes of assets as follows:

Buildings	20   Years
Machinery and equipment	3-5   Years
Office furniture and fixtures	5   Years
Leasehold improvements	Lesser of life of lease or useful life of asset

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

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is reflected in the consolidated statements of operations. For the years ended December 31, 2016, 2015, and 2014, such amounts are negligible. Expenditures for repairs and maintenance are charged to operations as incurred.

Long-lived assets, such as fixed assets, are reviewed for impairment whenever circumstances indicate that the carrying amount of the asset exceeds its estimated fair value. Considerable management judgment is necessary to estimate its fair value. Accordingly, actual results could differ from such estimates. No events have been identified that caused an evaluation of the recoverability of long-lived assets.

Our policy on internal use software is in accordance with ASC 350, "Intangibles- Goodwill and Other." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. We expensed all such software development costs in 2016, 2015, and 2014, as we believe that such amounts are immaterial.

37

Depreciation and amortization expense related to property and equipment, including property and equipment under capital leases was $1.8 million, $2.0 million, and $2.0 million for the years ended December 31, 2016, 2015, and 2014.

Income Taxes

We account for income taxes in accordance with ASC 740-10, "Income Taxes."  Under ASC 740-10, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015.  We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability ("hanging credit") related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

We follow the provisions of ASC 74-10 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.

Goodwill and other intangible assets

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

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, Cyber Operations and Defense ("CO&D"), Identity Management, and IT & Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows. In addition, the estimate of the total fair value of our reporting units 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, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair 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.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount is not recoverable. As of December 31, 2016, no impairment charges were taken.

38

Stock-Based Compensation

Compensation cost is recognized based on the requirements of ASC 718, "Stock Compensation," for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding.  Such stock is subject to a vesting schedule as follows: 25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis. Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

Research and Development

For all years presented, we charge all research and development costs to expense as incurred. For research and development costs for software to be sold, leased or otherwise marketed, such costs are capitalized once technological feasibility is reached. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified. To date, no such costs have been capitalized, as costs incurred after reaching technological feasibility have been insignificant. During 2016, 2015, and 2014, we incurred salary costs for research and development of approximately $2.6 million, $2.1 million, and $2.2 million, respectively, which are included as part of the selling, general and administrative expense in the consolidated statements of operations.

Earnings (Loss) per Share

As we do not have publicly held common stock or potential common stock, no earnings per share data is reported for any of the years presented.

Comprehensive Income

Comprehensive income includes changes in equity (net assets) during a period from non-owner sources. Our accumulated other comprehensive income was comprised of a loss from foreign currency translation of $82,000 and $70,000 as of December 31, 2016 and 2015, respectively; and actuarial gain on pension liability adjustments in Teloworks of $107,000 as of December 31, 2016 and 2015.

Financial Instruments

We use various methods and assumptions to estimate the fair value of our financial instruments. Due to their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value. The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on market prices for the same or similar issues. See Note 4 – Fair Value Measurements for fair value disclosures of the senior redeemable preferred stock.

Fair value estimates are made at a specific point in time, based on relevant market information. These estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual period beginning after December 15, 2017. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing," which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. These standards can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. We are in the initial stages of this assessment and continue to evaluate the available transition method.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40):  Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The new standard addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The new standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which requires an entity to measure inventory at the lower of cost and net realizable value. The provisions of the ASU are effective for periods beginning after December 15, 2016. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

39

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The guidance in this update supersedes the requirements in ASC Topic 840, Leases. The update will require business entities to recognize lease assets and liabilities on the balance sheet and to disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-08, "Revenues from Contract with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. This guidance is effective for interim and annual reporting periods  beginning after December 15, 2017. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In June 2016, 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. The new 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 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 financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments," which intends to reduce the diversity in practice in how certain transactions are classified on the statement of cash flows. This new standard will be effective retrospectively for interim and annual reporting periods beginning after December 31, 2017, and early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

Note 2.  Non-controlling Interests

On April 11, 2007, Telos ID was formed 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 Investors in exchange for $6 million in cash consideration. In accordance with ASC 505-10, "Equity-Overall," we recognized a gain of $5.8 million. As a result, we owned 60% of Telos ID, and therefore continue 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. Notwithstanding the foregoing, the allocations of profits and losses and distributions (including any distributions that relate to the year ending December 31, 2014, that are paid in a subsequent year) from the Closing Date through and including December 31, 2014, continued to be governed by the operating agreement of Telos ID in effect prior to the Closing Date and allocated based on the percentages of ownership prior to the Closing Date.

As of December 31, 2014, we had received $3 million of the $5 million of consideration for the sale. The remaining $2 million was recorded as a receivable and received in January 2015. Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID board of director seats.

40

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

● Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a "Change in Control"), the Class A member has the option to purchase the entire membership interest of the Class B member.

● Upon the occurrence of the following events: (i) the involuntary termination of John B. Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.

● In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.

● The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such violation.

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

Pursuant to the Transaction, the Class A and Class B members each owns 50% of Telos ID, as mentioned above, and as such was allocated 50% of the profits, which was $3.5 million and $2.4 million for 2016 and 2015, respectively. Prior to the Transaction, the Class A member owned 60% of Telos ID, as mentioned above, and as such was allocated 60% of the profits, which was $2.5 million for 2014. The Class B member owned 40% of Telos ID prior to the Transaction, and as such was allocated 40% of the profits, which was $1.7 million for 2014.  The Class B member was the non-controlling interest.

Distributions are made to the members only when and to the extent determined by the Telos ID's Board of Directors, in accordance with the Operating Agreement. During the year ended December 31, 2016, 2015, and 2014, the Class B member received a total of $1.9 million, $2.4 million and $1.5 million, respectively, of such distributions.

The following table details the changes in non-controlling interest for the years ended December 31, 2016, 2015, and 2014 (in thousands):

	2016			2015			2014
Non-controlling interest, beginning of period		635		$	584		$	454
Net income		3,506			2,438			1,676
Distributions		(1,912	)		(2,387	)		(1,548	)
Purchase of 10% membership interest		--			--			2
Non-controlling interest, end of period	$	2,229		$	635		$	584

41

Note 3. Goodwill and Other Intangible Assets

The goodwill balance was $14.9 million as of December 31, 2016 and 2015.  Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of December 31, 2016, no impairment charges were taken.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets were amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization was based on a forecast of approximately equal annual customer orders over the 5-year period. Amortization expense for 2016, 2015 and 2014 was $1.1 million, $2.3 million, and $2.3 million, respectively. The other intangible assets were fully amortized as of June 30, 2016.

Other intangible assets consist of the following:

	December 31, 2016				December 31, 2015
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Other intangible assets	$	11,286	$	11,286	$	11,286	$	10,157
	$	11,286	$	11,286	$	11,286	$	10,157

Note 4. Fair Value Measurements

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

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

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

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

As of December 31, 2016 and 2015, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis. Due to the liquid and short-term nature of cash, accounts receivable, and accounts payable, fair value is assumed to approximate book value. We believe the fair value of other debt approximates book value.

As of December 31, 2016 and 2015, the carrying value of the Senior Redeemable Preferred Stock was $2.1 million and $2.0 million, respectively. Since there have been no material modifications to the financial instruments, the estimated fair value of the Senior Redeemable Preferred Stock remains consistent with amounts recorded as of December 31, 2016.

As of December 31, 2016 and 2015, the carrying value of the Company's 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the "Public Preferred Stock") was $127.7 million and $123.9 million, respectively, and the estimated fair market value was $31.9 million and $32.3 million, respectively, based on quoted market prices.

Note 5. Revenue and Accounts Receivable

Revenue resulting from contracts and subcontracts with the U.S. Government accounted for 96.7%, 97.3%, and 96.1% of consolidated revenue in 2016, 2015, and 2014, respectively. As our primary customer base includes agencies of the U.S. Government, we have a concentration of credit risk associated with our accounts receivable, as 98.0% of our billed accounts receivable were directly with U.S. Government customers. While we acknowledge the potentially material and adverse risk of such a significant concentration of credit risk, our past experience of collecting substantially all of such receivables provide us with an informed basis that such risk, if any, is manageable. We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantee from our customers.  We maintain allowances for potential losses.

42

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 consolidated balance sheet, a loss on the sale is recorded and the residual amounts 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 year ended December 31, 2016, the Company sold approximately $35.3 million of receivables, and recognized a related loss of approximately $0.2 million in selling, general and administrative expenses for the same period. As of December 31, 2016, the balance of the sold receivables was approximately $1.0 million, and the related deferred price was approximately $0.1 million.

The components of accounts receivable are as follows (in thousands):

	December 31,
	2016			2015
Billed accounts receivable	$	13,164		$	15,340
Unbilled receivables		6,352			4,190
Allowance for doubtful accounts		(429	)		(485	)
	$	19,087		$	19,045

       The activities in the allowance for doubtful accounts are set forth below (in thousands):

	Balance Beginning of Year		Bad Debt Expenses (1)			Recoveries (2)		Balance End of Year
Year Ended December 31, 2016	$	485	$	(56	)	$	--	$	429
Year Ended December 31, 2015	$	372	$	113		$	--	$	485
Year Ended December 31, 2014	$	321	$	51		$	--	$	372

                    (1)          Accounts receivable reserves and reversal of allowance for subsequent collections, net

                    (2)          Accounts receivable written-off and subsequent recoveries, net

Revenue by Major Market and Significant Customers

We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:

	2016				2015				2014
					(dollar amounts in thousands)
Federal	$	130,415	96.7	%	$	117,328	97.3	%	$	122,549	96.1	%
State & Local, and Commercial		4,453	3.3	%		3,306	2.7	%		5,013	3.9	%
Total	$	134,868	100.0	%	$	120,634	100.0	%	$	127,562	100.0	%

43

Note 6. Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables

As of December 31, 2016 and 2015, the accounts payable and other accrued payables consisted of $12.1 million and $9.3 million, respectively, in trade account payables and $3.2 million and $3.4 million, respectively, in accrued payables.

Accounts Receivable Purchase Agreement

On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the "Maximum Amount") at any given time. The Purchase Agreement has an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. government, and 85% if the account debtor is not an agency of the U.S. government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivable are outstanding; (iii) a commitment fee equal to 1% per annum of Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements. At the time the Purchase Agreement was signed, the Company received proceeds in an amount equal to $6.3 million, net of an initial enrollment fee equal to $25,000. Those proceeds were used to repay the outstanding amount under the Facility to Wells Fargo as described below.

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

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

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

Financing and Security Agreement

On July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The maximum outstanding principal amount of advances under the Financing Agreement was $2.5 million, which was subsequently increased to $5 million on September 6, 2016. The Financing Agreement has a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. At the time the Financing Agreement was signed, the Company did not borrow any amounts under the Financing Agreement.

The Company shall pay Action Capital interest on the advances outstanding under the Financing Agreement at a rate equal to the prime rate of Wells Fargo Bank, N.A. in effect on the last business day of the prior month plus 2%, and a monthly fee equal to 0.50%. All interest calculations are based on a year of 360 days. The Company's obligations under the Financing Agreement are secured by certain assets of the Company pertaining to the Acceptable Accounts, including all accounts, accounts receivable, earned and unbilled revenue, contract rights, chattel paper, documents, instruments, general intangibles, reserves, reserve accounts, rebates, books and records, and all proceeds of the foregoing.

44

Pursuant to the terms of the Financing Agreement, Action Capital shall have full recourse against the Company when an Acceptable Account is not paid in full by the respective customer within 90 days of the date of purchase or if for any reason it ceases to be an Acceptable Account, including the right to charge-back any such Acceptable Account. It is considered an event of default if the Company breaches any covenant or warranty, knowingly provides false or incorrect material information to Action Capital, or otherwise defaults on any of its material obligations under the Financing Agreement or any other material agreements with Action Capital (subject to a cure period). If any such events of default occur, then Action Capital may take certain actions, including declaring any indebtedness immediately due and payable, requiring any customers with Acceptable Accounts to make payments directly to Action Capital, exercising its power of attorney from the Company to take actions in the Company's stead with respect to any of Company's Acceptable Accounts, or terminating the Financing Agreement.

As of December 31, 2016, there were no outstanding borrowings under the Financing Agreement.

In connection with the Purchase Agreement and the Financing Agreement, we terminated our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo"), effective as of July 15, 2016, prior to its maturity date of April 1, 2017, and repaid all amounts outstanding under the Facility; other than (1) the obligations of the Company under the Facility and related loan documents with respect to letters of credits and fees, charges, costs and expenses related thereto, (2) the obligations of the Company under the Facility and related loan documents to reimburse Wells Fargo for costs and expenses that may become due and payable after the date of the termination of the Facility, and (3) any customary contingent indemnification obligations. The Company paid an early termination fee of $100,000, and no other early termination fees or prepayment penalties were incurred by the Company in connection with the termination of the Facility.

Senior Revolving Credit Facility

On August 12, 2015, we amended our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to July 1, 2016. On November 17, 2015, the Facility was further amended to extend the maturity date to October 1, 2016. As of December 31, 2015, we were in compliance with the Facility's financial covenants, including EBITDA covenants.

As of December 31, 2015, the interest rate on the Facility was 5.75%. We incurred interest expense in the amount of $0.2 million, $0.6 million, and $0.7 million for the years ended December 31, 2016, 2015, and 2014, respectively, on the Facility.

On March 30, 2016 the Facility was amended ("the Seventeenth Amendment") to extend the maturity date to January 1, 2017. The Seventeenth Amendment also amended the terms of the Facility, reducing the total credit available from $20 million to $10 million effective as of the date of the amendment, which more appropriately reflected the Company's projected utilization of the Facility. The Seventeenth Amendment fixed the interest rate at the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%.  The Seventeenth Amendment also increased the minimum excess availability requirement under the revolving component from $1.25 million to $2.0 million, effective as of the date of the amendment, and increased the requirement to $2.5 million, effective July 1, 2016, and $3.0 million, effective November 1, 2016, if the Company did not receive $5 million of equity or subordinated debt investment by June 1, 2016. If such capital investment was not received by June 1, 2016, we would pay a fee of $100,000 to Wells Fargo, which was paid in June 2016. In consideration for the closing of the Seventeenth Amendment, we paid Wells Fargo a fee of $100,000, plus expenses related to the closing.

On May 16, 2016, the Facility was amended to extend the maturity date to April 1, 2017.

At December 31, 2015, we had outstanding borrowings of $8.5 million on the Facility, which included the $3.2 million of term loan, of which $1.4 million was short-term.  At December 31, 2015, we had unused borrowing availability on the Facility of $5.8 million. The effective weighted average interest rates on the outstanding borrowings under the Facility was 6.7% for the year ended December 31, 2015.

On July 15, 2016, the outstanding balance under the Facility was paid in full.

Subordinated Debt

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter").  Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the "Subordination Agreements") with Porter and Wells Fargo, in which the Porter Notes are fully subordinated to the Facility and any subsequent senior lenders (including Action Capital), and payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 for 2016 and 2015, respectively, on the Porter Notes. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.

45

Note 7. Redeemable Preferred Stock

Senior Redeemable Preferred Stock

The Senior Redeemable Preferred Stock is senior to all other outstanding equity of the Company, including the Public Preferred Stock. The Series A-1 ranks on a parity with the Series A-2. The components of the authorized Senior Redeemable Preferred Stock are 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred Stock, each with $.01 par value. The Senior Redeemable Preferred Stock carries a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share. The dividends are payable semiannually on June 30 and December 31 of each year. We have not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013. The liquidation preference of the Senior Redeemable Preferred Stock is the face amount of the Series A-1 and A-2 ($1,000per share), plus all accrued and unpaid dividends.

Due to the terms of the Facility, the Porter Notes, other senior obligations currently or previously in existence, the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we have been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013. In addition, certain holders of the Senior Redeemable Preferred Stock have entered into standby agreements whereby, among other things, those holders will not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended. As a result of such standby agreements, as of December 31, 2016, instruments held by Toxford Corporation ("Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on May 31, 2018. 

At December 31, 2016 and 2015, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 197 shares and 276 shares for Series A-1 and Series A-2, respectively. Due to the limitations, contractual restrictions, and agreements described above, the Senior Redeemable Preferred Stock is classified as noncurrent as of December 31, 2016.

At December 31, 2016 and 2015, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.6 million.  We accrued dividends on the Senior Redeemable Preferred Stock of $67,000 for the years ended December 31, 2016, 2015, and 2014, respectively, which were reported as interest expense. Prior to the effective date of ASC 480-10, "Distinguishing Liabilities from Equity," on July 1, 2003, such dividends were charged to stockholders' deficit.

Public Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006.  The Public Preferred Stock was fully accreted as of December 2008.  We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2016 and 2015, was 3,185,586. The Public Preferred Stock is quoted as TLSRP on the OTCQB marketplace and the OTC Bulletin Board.

Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the Facility and the Porter Notes to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments continue to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Facility and the Porter Notes, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the consolidated balance sheets as of December 31, 2016 and 2015.

Until July 15, 2016, we were parties with certain of our subsidiaries to the Facility agreement with Wells Fargo. Under the Facility, we agreed that, so long as any credit under the Facility is available and until full and final payment of the obligations under the Facility, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

46

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. The Porter Notes and the Senior Redeemable Preferred Stock prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization payments with respect to the Public Preferred Stock.  Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from December 31, 2016. This classification is consistent with ASC 210-10, "Balance Sheet" and 470-10, "Debt" and the FASB ASC Master Glossary definition of "Current Liabilities."

ASC 210-10 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470-10 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

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

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $95.9 million and $92.1 million as of December 31, 2016 and 2015, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for the years ended December 31, 2016, 2015, and 2014, which was recorded as interest expense. Prior to the effective date of ASC 480-10 on July 1, 2003, such dividends were charged to stockholders' accumulated deficit.

47

Note 8. Stockholders' Deficit, Option Plans, and Employee Benefit Plan

Common Stock

The relative rights, preferences, and limitations of the Class A common stock and the Class B common stock are in all respects identical. The holders of the common stock have one vote for each share of common stock held.  Subject to the priority rights of the Public Preferred Stock and any series of the Senior Preferred Stock, holders of Class A and Class B common stock are entitled to receive such dividends as may be declared.

Restricted Stock Grants

Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding.  Such stock is subject to a vesting schedule as follows:  25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services.  In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.  Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

Stock Options

In 1996, the Board of Directors approved and the shareholders ratified the 1996 Stock Option Plan ("1996 Stock Option Plan"). As determined by the members of the Compensation Committee, we generally grant options under our respective plans at the estimated fair value at the date of grant, based upon all information available to it at the time.

1996 Stock Option Plan

The 1996 Stock Option Plan allowed for the award of options to purchase up to 6,644,974 shares of Class A common stock at an exercise price of not lower than the estimated fair value at the date of grant.  Vesting of the stock options for key employees was based both upon the passage of time, generally four years, and certain key events occurring including an initial public offering or a change in control. The stock options may be exercised over a ten-year period subject to the vesting requirements. Effective May 10, 2004, the 1996 Stock Option Plan was amended by the Board of Directors to increase the total amount of authorized shares of Class A common stock to 7,345,433, an increase of 700,459 shares, to reflect those options granted to Mr. Wood that were not exercised under the 1993 Stock Option Plan. The 1996 Stock Option Plan expired in March 2006, with its remaining 516,000 unissued options canceled. A total of 20,000 options were exercised in 2014. A total of 2,463,500 options were exchanged for restricted stock in June 2008.

A summary of the status of our stock options for the year ended December 31, 2014 is as follows:

	Number of Shares (000's)			Weighted Average Exercise Price
2014  Stock Option Activity
Outstanding at beginning of year		20		$	0.62
Granted		--			--
Exercised		(20	)		0.62
Canceled		--			--
Outstanding at end of year		--			--
Exercisable at end of year		--			--

There were no options outstanding and exercisable at December 31, 2016 and 2015.

48

Telos Shared Savings Plan

We sponsor a defined contribution employee savings plan (the "Plan") under which substantially all full-time employees are eligible to participate. The Plan holds 3,658,536 shares of Telos Class A common stock. Since no public market exists for Telos Class A common stock, the Trustees of the Plan and their professional advisors undertake an annual evaluation, based upon the most recent audited financial statements. To date, the Plan's trustees have priced the stock at the exact midpoint of the evaluated range of the value of the stock.  We match one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Participant contributions vest immediately, and Company contributions vest at the rate of 20% for each year, with full vesting occurring after completion of five years of service. The Company's matching contributions to the Plan were suspended for 2015. Our total contributions to this Plan for 2016, 2015, and 2014 were $575,000, $0, and $624,000, respectively.

Additionally, effective September 1, 2007, Telos ID sponsors a defined contribution savings plan (the "Telos ID Plan") under which substantially all full-time employees are eligible to participate.   Telos ID matches one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Telos ID's matching contributions to the Telos ID Plan were suspended for 2015. The total 2016, 2015, and 2014 Telos ID contributions to this plan were $96,000, $0, and $83,000, respectively.

Note 9.  Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2016		2015			2014
Current provision (benefit)
Federal	$	114	$	(902	)	$	(1,759	)
State		28		54			(194	)
Total current		142		(848	)		(1,953	)
Deferred provision (benefit)
Federal		155		4,333			(3,820	)
State		37		780			(215	)
Total deferred		192		5,113			(4,035	)
Total provision (benefit)	$	334	$	4,265		$	(5,988	)

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2016	2015	2014
Computed expected income tax provision	34.0%	34.0%	35.0%
State income taxes, net of federal income tax benefit	0.8	2.1	2.5
Change in valuation allowance for deferred tax assets	(21.5)	(61.3)	0.1
Cumulative deferred adjustments	(0.3)	(0.1)	(0.3)
Provision to return adjustments	(0.4)	1.3	1.1
Other permanent differences	(1.8)	(1.1)	(0.5)
Dividend and accretion on preferred stock	(19.3)	(11.3)	(7.5)
FIN 48 liability	0.7	(0.8)	(0.6)
R&D credit	3.3	1.6	3.0
Other	(0.4)	(0.9)	--
	(4.9)%	(36.5)%	32.8%

49

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	161		$	176
Allowance for inventory obsolescence and amortization		778			623
Accrued liabilities not currently deductible		2,234			2,218
Accrued compensation		1,006			840
Deferred rent		7,682			8,008
Net operating loss carryforwards - federal		1,301			524
Net operating loss carryforwards - state		405			344
Federal tax credit		533			202
Total gross deferred tax assets		14,100			12,935
Less valuation allowance		(10,499	)		(9,027	)
Total deferred tax assets, net of valuation allowance		3,601			3,908
Deferred tax liabilities:
Amortization and depreciation		(2,696	)		(3,307	)
Unbilled accounts receivable, deferred for tax purposes		(787	)		(589	)
Goodwill basis adjustment and amortization		(3,451	)		(3,199	)
Telos ID basis difference		(58	)		(12	)
Total deferred tax liabilities		(6,992	)		(7,107	)
Net deferred tax liabilities	$	(3,391	)	$	(3,199	)

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period
December 31, 2016	$	9,027	$	1,472	$	--		$	10,499
December 31, 2015	$	1,868	$	7,159	$	--		$	9,027
December 31, 2014	$	1,901	$	--	$	(33	)	$	1,868

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

At December 31, 2016, for federal income tax purposes there was approximately $3.8 million net operating loss available to be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2036. Additionally, approximately $3.8 million of alternative minimum tax net operating loss carryforwards are available to offset future alternative minimum taxable income. These alternative minimum tax net operating loss carryforwards also expire in 2036.  In addition, there was approximately $60,000 of alternative minimum tax credit available to be carried forward indefinitely to reduce future regular tax liabilities.

Under the provisions of ASC 740-10, we determined that there were approximately $762,000 and $803,000 of unrecognized tax benefits, including $233,000 and $210,000 of related interest and penalties, required to be recorded in other liabilities as of December 31, 2016 and 2015, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2013 to 2016, has not been extended beyond the applicable statute of limitations.

50

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2016			2015			2014
Unrecognized tax benefits, beginning of period	$	803		$	708		$	607
Gross (decreases) increases—tax positions in prior period		(66	)		92			105
Gross increases—tax positions in current period		46			38			47
Settlements		(21	)		(35	)		(51	)
Unrecognized tax benefits, end of period	$	762		$	803		$	708

Note 10. Commitments

Leases

We lease office space and equipment under noncancelable operating and capital leases with various expiration dates, some of which contain renewal options.

On March 1, 1996, we entered into a 20-year capital lease for a building in Ashburn, Virginia, that serves as our corporate headquarters. We had accounted for this transaction as a capital lease and had accordingly recorded assets and a corresponding liability of approximately $12.3 million. Effective November 1, 2013, this lease was terminated and we entered into a 13-year lease ("the 2013 lease") that would have expired in October 31, 2026. The 2013 lease was treated as a modification in accordance with ASC 840, "Leases". As a result of the 2013 lease, the corresponding capital asset and liability increased by $11.7 million, resulting in a net book value of the capital asset of $13.1 million, and capital obligation of $15.5 million. The 2013 lease included an option to purchase, assign to, or designate a purchaser on June 1, 2014, which required notice of intent to exercise the option by not later than March 31, 2014.

On March 28, 2014, we entered into a definitive agreement with an unrelated third party to assign the purchase option to that third party in return for cash consideration of $1.7 million, payable upon the closing of the purchase transaction, and certain obligations under the agreement, including entering into a new 15-year lease with the third party upon the third party's exercise of the purchase option and purchase of the building from the prior landlord. On March 28, 2014, we provided the prior landlord notice of our assignment and exercise of the purchase option. On May 28, 2014 the third party completed the purchase transaction and the 2013 lease was terminated, with no ongoing obligations, by mutual agreement between us and the prior landlord. On the same day we entered into a new lease ("the 2014 lease") with the third party that expires on May 31, 2029. The 2014 lease was treated as a modification of the prior lease on the property in accordance with ASC 840, and determined to be a capital lease. As a result of the new lease, the corresponding capital asset increased by $5.7 million, resulting in a net book value of the capital asset of $18.3 million and the liability increased by $6.7 million, resulting in a capital obligation of $22.0 million. As part of this treatment, the net cash consideration received in connection with the definitive agreement was treated as a lease incentive that will be amortized over the life of the lease.

The following is a schedule by years of future minimum payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2016 (in thousands):

	Property			Equipment			Total
2017	$	1,899		$	1		$	1,900
2018		1,947			--			1,947
2019		1,995			--			1,995
2020		2,045			--			2,045
2021		2,096			--			2,096
Remainder		17,268			--			17,268
Total minimum obligations		27,250			1			27,251
Less amounts representing interest (ranging from 5.0% to 18.8%)		(7,343	)		--			(7,343	)
Net present value of minimum obligations		19,907			1			19,908
Less current portion		(917	)		(1	)		(918	)
Long-term capital lease obligations at December 31, 2016	$	18,990		$	--		$	18,990

51

Future minimum lease payments for all noncancelable operating leases at December 31, 2016 are as follows (in thousands):

2017	$	560
2018		491
2019		491
2020		505
2021		502
Remainder		719
Total minimum lease payments	$	3,268

In accordance with the 2014 Lease, the basic rent increases by a fixed 2.5% escalation annually. Rent expense charged to operations totaled $1.7 million, $1.8 million, and $1.1 million for 2016, 2015, and 2014, respectively.

Accumulated amortization for property and equipment under capital leases at December 31, 2016 and 2015 is $15.7 million and $14.5 million, respectively.

Warranties

We provide product warranties for products sold through certain U.S. Government contract vehicles. We accrue a warranty liability at the time that we recognize revenue for the estimated costs that may be incurred in connection with providing warranty coverage. Warranties are valued using historical warranty usage trends; however, if actual product failure rates or service delivery costs differ from estimates, revisions to the estimated warranty liability may be required. Accrued warranties are reported as other current liabilities on the consolidated balance sheets.

	Balance Beginning of Year		Accruals		Warranty Expenses			Balance End of Year
	(amount in thousands)
Year Ended December 31, 2016	$	133	$	279	$	(361	)	$	51
Year Ended December 31, 2015	$	189	$	125	$	(181	)	$	133
Year Ended December 31, 2014	$	113	$	140	$	(64	)	$	189

Note 11.  Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions between us and certain of our current shareholders and former officers is set forth below.

The brother of our Chairman and CEO, Emmett J. Wood, has been an employee of ours since 1996. The amounts paid to this individual as compensation for 2016, 2015, and 2014 were $401,000, $305,000, and $446,000, respectively.  Additionally, Mr. Wood owned 650,000 shares and 50,000 shares of the Company's Class A and Class B Common Stock, respectively, as of December 31, 2016 and 2015.

On March 31, 2015, the Company entered into the Porter Notes. Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 on the Porter Notes for the years ended December 31, 2016 and 2015, respectively. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.

52

Note 12. Summary of Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands):

	Quarters Ended
	March 31			June 30			Sept. 30			Dec. 31
2016
Revenue	$	27,078		$	26,798		$	54,940		$	26,052
Gross profit		10,582			9,452			14,538			8,874
(Loss) income before income taxes and non-controlling interest		(149	)		(1,323	)		1,503			(3,366	)
Net loss attributable to Telos Corporation (1)		(867	)		(1,912	)		(91	)		(4,305	)
2015
Revenue	$	28,019		$	32,028		$	33,662		$	26,925
Gross profit		6,778			7,170			8,674			8,051
Loss before income taxes and non-controlling interest		(3,030	)		(2,564	)		(959	)		(2,684	)
Net loss attributable to Telos Corporation (1)(2)		(2,746	)		(2,408	)		(1,406	)		(9,380	)

(1) Changes in net income are the result of several factors, including seasonality of the government year-end buying season, as well as the nature and timing of other deliverables.

(2) A full valuation allowance was recorded against the Company's deferred tax assets in the fourth quarter of 2015.

Note 13.  Commitments, Contingencies and Subsequent Events

Financial Condition and Liquidity

As described in Note 6 – Current Liabilities and Debt Obligations, we maintain a Purchase Agreement with RCA and a Financing Agreement with Action Capital. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. If we are unable to maintain the new financing arrangements, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

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

Additionally, as a  result of operations for 2014 and 2015, and the continued impact of contract delays as well as other government budgetary funding issues, management determined the need to raise additional working capital. Accordingly, in December 2014, we sold 10% of the membership interests in Telos ID to the Telos ID Class B member for $5 million, and, in March 2015, we issued the Porter Notes. As discussed in detail below in Subsequent Events, in January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. Management currently believes that the Company's existing borrowing capacity under the Purchase Agreement and the Financing Agreement discussed above as well as the proceeds of the January 2017 financing, are sufficient to fund our capital and liquidity needs for the next 12 months.

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

53

Our working capital was $(8.6) million and $1.1 million as of December 31, 2016 and 2015, respectively. Although no assurances can be given, we expect that our financing arrangements with RCA and Action Capital, collectively, as well as the proceeds of the January 2017 financing discussed further in Subsequent Events below, are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Legal Proceedings

Costa Brava Partnership III, L.P.

As previously reported, on October 17, 2005, Costa Brava Partnership III, L.P. ("Costa Brava"), a holder of Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). A second holder of the Company's Public Preferred Stock, Wynnefield Small Cap Value, L.P. ("Wynnefield"), subsequently intervened as a co-Plaintiff (Costa Brava and Wynnefield are hereinafter referred to as "Plaintiffs"). On February 27, 2007, Plaintiffs added, as an additional defendant, Mr. John R. C. Porter, a holder of the Company's Common Stock and Senior Redeemable Preferred Stock.

In the litigation, Plaintiffs allege, among other things, that the Company and its officers and directors engaged in tactics to avoid paying dividends on the Public Preferred Stock, that the Company made improper bonus payments or awards to officers and directors, that certain former and present officers and directors breached legal duties or the standard of care that they owed the Company, that the Company improperly paid consulting fees to and engaged in loan transactions with Mr. Porter, that the Company failed to improve on the Company's purported insolvency, that the Company failed to redeem the Public Preferred Stock as alledgedly required by the Company's charter, and shareholder oppression against Mr. Porter.

On December 22, 2005, the Company's Board of Directors established a special litigation committee ("Special Litigation Committee"), composed of certain independent directors, to review and evaluate the matters raised in the litigation. On July 20, 2007, the Special Litigation Committee, in its final report, concluded that the available evidence did not support Plaintiffs' derivative claims and that it was not in the best interests of the Company to pursue such claims in the litigation. On August 24, 2007, the Company moved to dismiss Plaintiffs' derivative claims based upon the report and to dismiss all remaining claims for failure to state a claim. Following an evidentiary hearing, the Circuit Court dismissed all derivative claims based upon the recommendation of the Special Litigation Committee on January 7, 2008.

On February 12, 2008, the Plaintiffs filed a Third Amended Complaint that included both new counts and previously dismissed counts. The Company moved to dismiss or strike the Third Amended Complaint and, on April 15, 2008, the Circuit Court issued an order dismissing with prejudice all counts in the Third Amended Complaint that were not previously disposed of by motion or stipulation. On December 2, 2008, the Company filed a motion for voluntary dismissal of its counterclaim against Plaintiffs (for their interference with the Company's relationship with Wells Fargo) without prejudice. The Circuit Court granted that motion, over Plaintiffs' opposition, on January 23, 2009.

Following Plaintiffs' appeal of the dismissal of their derivative claims and shareholder oppression claim, on September 7, 2012, the Court of Special Appeals of Maryland ruled that the Circuit Court applied an incorrect standard of review to evaluate the conclusions of the Special Litigation Committee. The Court of Special Appeals held that the Circuit Court's dismissal of a shareholder oppression claim (asserted against Mr. Porter) raised an issue of first impression under Maryland law and required further briefing in the Circuit Court. The Court of Special Appeals vacated the decision of the Circuit Court that had been appealed and remanded the case for further consideration and proceedings.

On October 24, 2012, the Company filed a petition for writ of certiorari in the Court of Appeals of Maryland, which was denied on January 22, 2013.

On remand, the Circuit Court held a status and scheduling conference on July 26, 2013, as a result of which the Circuit Court issued a memorandum to counsel setting a briefing schedule to address the motion filed by the Company and other defendants to dismiss or otherwise dispose of the derivative claims as a result of the findings of the Special Litigation Committee in its final report of July 20, 2007. On November 1, 2013, the Defendants filed a Motion to Dismiss the derivative claims under the standard of review dictated by the opinion of the Court of Special Appeals. Plaintiffs filed their Opposition to the Motion on December 23, 2013, and Defendants filed their Reply on January 23, 2014. A hearing on the Motion to Dismiss was held on April 24, 2014.  No decision has been rendered on the Company's motion to dismiss or otherwise dispose of the derivative claims, and the matter remains pending.

On September 17, 2013, the Plaintiffs filed a request for an entry of an order for default as to Mr. Porter, which was denied by the Circuit Court on November 8, 2013. Mr. Porter ultimately filed a motion to dismiss the claim against him on May 13, 2014, raising multiple grounds.  No decision has been rendered on Mr. Porter's motion to dismiss, and the matter remains pending.

54

As of December 31, 2016, Costa Brava and Wynnefield own 12.7% and 17.3%, respectively, of the outstanding Public Preferred Stock.

No material developments occurred in this litigation in 2016.

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

Hamot et al. v. Telos Corporation

As previously reported, since August 2, 2007, Messrs. Seth W. Hamot and Andrew R. Siegel, principals of Costa Brava Partnership III L.P. ("Costa Brava") and Class D Directors of the Company ("Class D Directors"), have been involved in litigation against the Company in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). The Class D Directors initially alleged that certain documents and records had not been promptly provided to them and were necessary to fulfill their duties as directors of the Company. Subsequently, the Class D Directors further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood's service as both CEO and Chairman of the Board was improper and impermissible under the Company's Bylaws.

By way of preliminary injunctions entered on August 28, 2007 and September 24, 2007, the Circuit Court ordered that the Class D Directors are entitled to documents in response to reasonable requests for information pertinent and necessary to perform their duties as members of the Board but, in light of the Costa Brava shareholder litigation, the Company is entitled to designated certain documents as "confidential" or "highly confidential" and to withhold certain documents from the Class D Directors based upon the attorney work product doctrine or attorney-client privilege. Pursuant to the preliminary injunctions, the Class D Directors are also entitled to receive written responses to requests for Board of Directors or Board committee minutes within seven days of any such requests and copies of such minutes within fifteen days of any such requests, as well as written responses to all other requests for information and/or documents related to their duties as directors within seven days of such requests, and all Board of Directors appropriate information and/or documents within thirty days of any such requests.

On April 23, 2008, the Company filed a counterclaim against the Class D Directors for money damages and preliminary and injunctive relief based upon the Class D Directors' interference with, and improper influence of, the Company's independent auditors regarding, among other things, a specific accounting treatment. On June 27, 2008, the Circuit Court granted the Company's motion for preliminary injunction and enjoined the Class D Directors from contacting the Company's auditors until the completion of the Company's Form 10-K for the preceding year. This preliminary injunction expired by its own terms and an appeal from that ordered was held to be moot by the Court of Special Appeals of Maryland.

On April 12, 2010, the Class D Directors filed a motion for the advancement of legal fees and expenses incurred in defense of the Company's counterclaim. On November 3, 2011, the Circuit Court denied the Plaintiffs' motion, as well as the Plaintiffs' motion for partial summary judgment and request for attorneys' fees. On May 21, 2012, the Circuit Court denied Plaintiffs' motion for reconsideration of the same.

Trial on both the Class D Directors' books and records claims and the Company's counterclaims realated to the auditor interference commenced on July 5, 2013, and continued on several days in July 2013. The evidentiary portion of the trial concluded on August 1, 2013, and post-trial briefing concluded on September 16, 2013. The court decision on this matter is still pending and no material developments occurred in this litigation during 2016.

At this stage of the litigation it is impossible to reasonably determine the degree of probability related to the Class D Directors' success in any of their assertions and claims, or whether such success would entitle them to monetary relief. Although there can be no assurance as to the ultimate outcome of these proceedings, the Company and its officers and directors strenuously deny the Class D Directors' claims, and will vigorously defend the matter, and continue to oppose the relief sought.

Other Litigation

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

55

Subsequent Events

On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com, Inc., and Teloworks, Inc., as guarantors (together, the "Guarantors"), Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent"), and the lenders party thereto (the "Lenders"). The Credit Agreement provides for an $11,000,000 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 Accrual Rate of 13.0% per annum. 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 on the Company's and the Guarantor's collateral (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.

The amount of $1,112,222.22 was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A 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 and the Guarantors, 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 issuance of the Warrants was made pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(a)(2) thereof. Each Warrant contains appropriate transfer restriction legends.

Effective February 23, 2017, 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.

56

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

N/A.

Item 9A. Controls and Procedures

Inherent Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are effective at the reasonable assurance level. However, management does not expect that such disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2016, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), 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.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:

(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control — Integrated Framework (2013). Based on that assessment, the Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of December 31, 2016.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

57

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2016 annual meeting of stockholders, or the Proxy Statement, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference.

Item 10.   Directors, Executive Officers and Corporate Governance

Information required by this item regarding executive officers, directors and nominees for directors, including information with respect to our audit committee and audit committee financial expert, and the compliance of certain reporting persons with Section 16(a) of the Securities Exchange Act of 1934, as amended, will be included under Election of Directors, Biographical Information Concerning the Company's Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, Independence of Directors, Board of Directors Nomination Process, Role in Risk Oversight, Meetings of the Board of Directors and Committees of the Board of Directors, as well as Audit Committee, Management Development and Compensation Committee, and Nominating and Corporate Governance Committee, in the Proxy Statement and is incorporated herein by reference.

Item 11.   Executive Compensation

The information required by this item will be included in our Proxy Statement under Compensation of Executive Officers and Directors and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be included in our Proxy Statement under Security Ownership of Certain Beneficial Owners and Management and is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be included in our Proxy Statement under Certain Relationships and Related Transactions, and Independence of Directors and is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services

The information required by this item will be included in our Proxy Statement under Independent Registered Public Accounting Firm and is incorporated herein by reference.

58

PART IV

Item 15.  Exhibits and Financial Statement Schedules

1.     Financial Statements

As listed in the Index to Financial Statements and Supplementary Data on page 26.

2.     Financial Statement Schedules

All schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements or related notes.

3.     Exhibits:

Exhibit Number	Description
3.1	Articles of Amendment and Restatement of C3, Inc. (Incorporated by reference to the Company's Registration Statement No. 2-84171 filed June 2, 1983)
3.2	Articles of Amendment of C3, Inc. dated August 31, 1981 (Incorporated by reference to the Company's Registration Statement No. 2-84171 filed June 2, 1983)
3.3	Articles supplementary of C3, Inc. dated May 31, 1984 (Incorporated by reference to the Company's Form 10-K report for the fiscal year ended March 31, 1987)
3.4	Articles of Amendment of C3, Inc. dated August 18, 1988 (Incorporated by reference to the Company's Form 10-K report for the fiscal year ended March 31, 1989)
3.5	Articles of Amendment and Restatement Supplementary to the Articles of Incorporation dated August 3, 1990. (Incorporated by reference to C3, Inc. 10-Q for the quarter ended June 30, 1990)
3.6	Articles of Amendment of C3, Inc. dated April 13, 1995 (Incorporated by reference to Exhibit 3.7 filed with the Company's Form 10-K report for the year ended December 31, 1995)
3.7	Amended and Restated Bylaws of the Company, as amended on October 3, 2007 (Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on October 5, 2007)
4.1	Credit Agreement, dated January 25, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, Inc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto (Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on January 31, 2017)
4.2+	First Amendment to Credit Agreement, effective as of February 23, 2017, among Telos Corporation, Xacta Corporation, ubIQuity.com, Inc., Teloworks, Inc., Enlightenment Capital Solutions Fund II, L.P., and the lenders party thereto
10.1*	1996 Stock Option Plan (Incorporated by reference to Exhibit 10.74 filed with the Company's Form 10-Q report for the quarter ended March 31, 1996)
10.2*	Telos Corporation 2008 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.21 filed with the Company's Form 10-K report for the year ended December 31, 2007)
10.3	Preferred Stockholders Standby Agreement between Wells Fargo Foothill, Inc. and North Atlantic Smaller Companies Investment Trust PLC, dated April 14, 2008 (Incorporated by reference to Exhibit 10.15 filed with the Company's Form 10-K report for the year ended December 31, 2008)
10.4	Series A-1 and Series A-2 Redeemable Preferred Stock Extension of Redemption Date – North Atlantic Smaller Companies Investment Trust PLC, dated April 6, 2008 (Incorporated by reference to Exhibit 10.17 filed with the Company's Form 10-K report for the year ended December 31, 2008)
10.5	Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated May 17, 2010 (Incorporated by reference to Exhibit 99.1 filed with the Company's Form 8-K report on May 21, 2010)
10.6	Preferred Stockholders Standby Agreement between Wells Fargo Foothill, Inc. and Toxford Corporation, dated May 17, 2010 (Incorporated by reference to Exhibit 99.2 filed with the Company's Form 8- K report on May 21, 2010)
10.7	First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 (Incorporated by reference to Exhibit 10.28 filed with the Company's Form 10-Q report for the quarter ended September 30, 2010)
10.8	Second Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated May 11, 2012 (Incorporated by reference to Exhibit 10 filed with the Company's Form 10-Q report for the quarter ended June 30, 2012)
10.9*	Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and John B. Wood (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
10.10*	Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and Edward L. Williams (Incorporated by reference to Exhibit 10.2 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
10.11*	Second Amended Employment Agreement, dated as of November 12, 2012, between the Company and Michele Nakazawa (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)

10.12*   Amendment to Employment Agreement, dated as of November 12, 2012, between the Company and Brendan D. Malloy (Incorporated by reference to Exhibit 10.4 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)

59

10.13*	Form of Employment Agreement between the Company and six of its executive officers (Incorporated by reference to Exhibit 10.5 filed with the Company's Form 10-Q report for the quarter ended September 30, 2012)
10.14*	Telos Corporation 2013 Omnibus Long-Term Incentive Plan (Incorporated by reference to Appendix A filed with the Company's Definitive Proxy Statement on Schedule 14A on April 16, 2013)
10.15*	Form Restricted Stock Agreement (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on May 15, 2013)
10.16	Third Amendment to Second Amended and Restated Loan and Security Agreement and First Amendment to Amended and Restated General Continuing Guaranty between the Company and Wells Fargo Capital Finance, LLC dated June 11, 2013 (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended June 30, 2013)
10.17	Fourth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated July 31, 2013 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on August 6, 2013)
10.18*	Telos Corporation Senior Officer Incentive Program (Incorporated by reference to Exhibit 10.27 filed with the Company's Form 10-K report for the year ended December 31, 2013)
10.19	Waiver and Fifth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated March 27, 2014 (Incorporated by reference to Exhibit 10.28 filed with the Company's Form 10-K report for the year ended December 31, 2013)
10.20*	Employment Agreement, dated as of January 4th, between the Company and Jefferson V. Wright (Incorporated by reference to Exhibit 10.29 filed with the Company's Form 10-K report for the year ended December 31, 2013)
10.21	Sixth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated May 13, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended March 31, 2014)
10.22	Seventh Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated June 26, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended June 30, 2014)
10.23	Eighth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated November 13, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2014)
10.24	Membership Interest Purchase Agreement, dated as of December 24, 2014, by and among Telos Corporation and Hoya ID Fund A, LLC (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on December 31, 2014)
10.25	Second Amended and Restated Operating Agreement of Telos Identity Management Solutions , LLC, dated December 24, 2014 (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on December 31, 2014)
10.26	Consent and Ninth Amendment to Second Amended and Restated Loan and Security Agreement, by and among Telos Corporation, XACTA Corporation, UBIQUITY.COM, Inc., Teloworks, Inc. and Wells Fargo Capital Finance, LLC, dated December 24, 2014 (Incorporated by reference to Exhibit 99.3 filed with the Company's Current Report on Form 8-K on December 31, 2014)
10.27	Tenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated February 27, 2015 (Incorporated by reference to Exhibit 10.34 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.28	Eleventh Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 19, 2015 (Incorporated by reference to Exhibit 10.35 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.29	Waiver and Twelfth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.36 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.30	Subordinated Loan Agreement between the Company and Porter Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.37 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.31	Subordinated Promissory Note between the Company and Porter Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.38 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.32	Subordinated Loan Agreement between the Company and JP Charitable Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.39 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.33	Subordinated Promissory Note between the Company and JP Charitable Foundation Switzerland dated March 31, 2015 (Incorporated by reference to Exhibit 10.40 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.34	Subordination and Intercreditor Agreement by and among the Company, Porter Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.41 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)
10.35	Subordination and Intercreditor Agreement by and among the Company, JP Charitable Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015 (Incorporated by reference to Exhibit 10.42 filed with the Company's Form 10-K/A report for the year ended December 31, 2014)

60

10.36	Thirteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated April 23, 2015 (Incorporated by reference to Exhibit 10.36 filed with the Company's Form 10-K report for the year ended December 31, 2015)
10.37	Fourteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated August 12, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended June 30, 2015)
10.38	Fifteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated November 17, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended September 30, 2015)
10.39	Sixteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated February 19, 2016 (Incorporated by reference to Exhibit 10.39 filed with the Company's Form 10-K report for the year ended December 31, 2015)
10.40	Seventeenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 30, 2016 (Incorporated by reference to Exhibit 10.41 filed with the Company's Form 10-K report for the year ended December 31, 2015)
10.41	Series A-1 and Series A-2 Redeemable Preferred Stock Extension of Redemption Date – Toxford Corporation, dated March 17, 2016 (Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q report for the quarter ended March 31, 2016)
10.42	Eighteenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated May 16, 2016 (Incorporated by reference to Exhibit 10.2 filed with the Company's Form 10-Q report for the quarter ended March 31, 2016)
10.43	Accounts Receivable Purchase Agreement between Telos Corporation and Republic Capital Access, LLC dated July 15, 2016 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on July 21, 2016)
10.44	Financing and Security Agreement between Telos Corporation and Action Capital Corporation, dated July 15, 2016 (Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K on July 21, 2016)
10.45*	Telos Corporation 2016 Omnibus Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 filed with the Company's Form 10-Q report for the quarter ended June 30, 2016)
10.46*	Notice of Grant of Restricted Stock (Incorporated by reference to Exhibit 10.4 filed with the Company's Form 10-Q report for the quarter ended June 30, 2016)
10.47	Amendment to Financing and Security Agreement Between the Company and Action Capital Corporation dated September 6, 2016 (Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K on September 9, 2016)
10.48*+	Telos ID Sale Bonus Plan
21+	List of subsidiaries of Telos Corporation
31.1+	Certification pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2+	Certification pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32+	Certification pursuant to 18 USC Section 1350.
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

*   constitutes a management contract or compensatory plan or arrangement

+   filed herewith

^   in accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K shall be deemed to be "furnished" and not "filed"

Item 16.  Form 10-K Summary

None.

61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Telos Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		TELOS CORPORATION
	By:	/s/ John B. Wood
		John B. Wood Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
	Date:	March 30, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Telos Corporation and in the capacities and on the dates indicated.
Signature	Title		Date
/s/ John B. Wood	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)		March 30, 2017
John B. Wood
/s/ Michele Nakazawa	Chief Financial Officer (Principal Financial and Accounting Officer)		March 30, 2017
Michele Nakazawa
/s/ Bernard C. Bailey	Director		March 30, 2017
Bernard C. Bailey
/s/ David Borland	Director		March 30, 2017
David Borland
	Director
Seth W. Hamot
/s/ Bruce R. Harris	Director		March 30, 2017
Bruce R. Harris, Lt. Gen., USA (Ret.)
/s/ Charles S. Mahan	Director		March 30, 2017
Charles S. Mahan, Jr. Lt. Gen., USA (Ret)
/s/ John W. Maluda	Director		March 30, 2017
John W. Maluda, Major Gen,, USAF (Ret)
/s/ Robert J. Marino	Director		March 30, 2017
Robert J. Marino
	Director
Andrew R. Siegel

62

EX-4.2

Exhibit 4.2

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Agreement") is entered into effective as of February 23, 2017 (the "First Amendment Effective Date") by and among TELOS CORPORATION, a Maryland corporation (the "Borrower"), the Guarantors party hereto, the Lenders party hereto and ENLIGHTENMENT CAPITAL SOLUTIONS FUND II, L.P., a Delaware limited partnership, as Agent(in such capacity, the "Agent").  All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement referred to below.

RECITALS

A.          A Credit Agreement dated as of January 25, 2017 (as amended or modified from time to time, the "Credit Agreement") has been entered into by and among the Borrower, the Guarantors from time to time party thereto, the Lenders from time to time party thereto and the Agent.

B.          The Borrower has requested that the Lenders grant additional time to complete the post-closing requirements pursuant to the Credit Agreement and the Required Lenders have agreed to the requested amendments as provided herein on the terms and conditions set forth below.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.          Subsection 5.22(a) of the Credit Agreement is amended in its entirety to read as follows:

(a)          General.  The proceeds of the Loans shall be used solely for Permitted Uses.  On the Closing Date, the proceeds of the Loans shall be applied to Permitted Uses consisting of paying costs, fees and expenses related to the Transactions.  On or before April 28, 2017 (unless the Agent has agreed in writing otherwise), the proceeds of the Loans shall be applied to Permitted Uses consisting of (i) the payment in full of all outstanding Porter Subordinated Debt and (ii) the purchase (and concurrent cancellation) or redemption of the portion of the Senior Preferred Stock not held by John R. C. Porter or his Affiliates in an aggregate amount of approximately $360,000.  The remaining proceeds of the Loans may be applied at any time to the Permitted Uses consisting of growth capital and other general corporate purposes of the Borrower and its Subsidiaries.

2.          Condition Precedent to Effectiveness.  The amendmentto the Credit Agreement set forth herein shall be deemed effective on the First Amendment Effective Date once:

(a)          The Agent has received duly executed counterparts of this Agreement from the Loan Parties, the Required Lenders and the Agent.

(b)          The Borrower shall have paid all reasonable out-of-pocket costs and expenses of the Agent or the Lenders (including without limitation the reasonable fees, costs and expenses of Moore & Van Allen PLLC, as counsel to the Agent) in connection with this Agreement or otherwise due and payable pursuant to the Loan Documents.

3.          Representations and Warranties.  Each Loan Party hereby represents and warrants to the Agent and the Lenders that, upon giving effect to this Agreement, (a) no Default or Event of Default exists and (b) all of the representations and warranties set forth in the Loan Documents are true and correct in all material respects as of the date hereof (except for those that expressly state that they are made as of an earlier date, in which case they shall be true and correct in all material respects as of such earlier date).

4.          Ratification of Credit Agreement and other Loan Documents.  Except as expressly modified and amended in this Agreement, all of the terms, provisions and conditions of the Loan Documents shall remain unchanged and in full force and effect.  The term "this Agreement" or "Credit Agreement" and all similar references as used in each of the Loan Documents shall hereafter mean the Credit Agreement as amended by this Agreement.  Except as herein specifically agreed, the Credit Agreement and each other Loan Document is hereby ratified and confirmed and shall remain in full force and effect according to its terms.

5.          Affirmation of Liens and Guarantees.  (i) Each Loan Party affirms the liens and security interests created and granted by it in the Loan Documents and agrees that this Agreement shall in no manner adversely affect or impair such liens and security interests and (ii) each Guarantor affirms its Guarantee under Article XI of the Credit Agreement.

6.          Authority/Enforceability.  Each Loan Party hereby represents and warrants as follows:

(a) It has taken all necessary action to authorize the execution, delivery and performance of this Agreement.

(b) This Agreement has been duly executed and delivered by each Loan Party and constitutes such Loan Party's legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity).

(c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by each Loan Party of this Agreement other than those obtained on or before the date hereof and those which, if not obtained, delivered or filed (as the case may be) could not reasonably be expected to have a Material Adverse Effect.  The execution, delivery and performance by each Loan Party of this Agreement does not and will not conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of each Loan Party or any indenture or other material agreement or instrument to which such Person is a party or by which any of its properties may be bound or the approval of any Governmental Authority relating to the Borrower except as could not reasonably be expected to have a Material Adverse Effect.

2

7.          Expenses.  The Borrower agrees to pay all reasonable costs and expenses in connection with the preparation, execution and delivery of this Agreement, including without limitation the reasonable fees and expenses of Moore & Van Allen PLLC, special counsel to the Agent.

8.          Counterparts/Telecopy/E-mail.  This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument.  Delivery of executed counterparts by telecopy or electronic mail shall be effective as an original.

9.          GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

10.          Entirety. This Agreement and the other Loan Documents embody the entire agreement between the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof.  These Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties.  There are no oral agreements between the parties.

11.          Release.  In consideration of the willingness of the Agent and the Lenders to enter into this Agreement, each Loan Party hereby releases and forever discharges each of the Agent and the Lenders (including its predecessors, successors and assigns) and its affiliates, and each of their respective officers, employees, representatives, agents, counsel and directors(each, a "Lender Party"), from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected, to the extent related to the Loan Documents or the loan transactions described therein(collectively, the "Released Claims"), which Released Claims relate to any act or omission by any Lender Party that occurred on or prior to the date hereof, except to the extent any such Released Claim results from any Lender Party's willful misconduct as finally determined by a court of competent jurisdiction.

[Signature pages to follow]

3

IN WITNESS WHEREOF, the parties hereto have caused this Agreement, to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

Borrower:	TELOS CORPORATION
	a Maryland corporation
	By:	/s/ John B. Wood
	Name:	John B. Wood
	Title:	President & CEO

GUARANTORS:	UBIQUITY.COM, INC., a Delaware corporation
	By:	/s/ John B. Wood
	Name:	John B. Wood
	Title:	President & CEO
	XACTA CORPORATION, a Delaware corporation
	By:	/s/ John B. Wood
	Name:	John B. Wood
	Title:	President & CEO
	TELOWORKS, INC., a Delaware corporation
	By:	/s/ David Easley
	Name:	David Easley
	Title:	President

Agent and Lender:	ENLIGHTENMENT CAPITAL SOLUTIONS FUND II, L.P., as Agent and as Lender
	By:	/s/ Devin Talbott
	Name:	Devin Talbott
	Title:	Managing Partner

Lenders:	ENLIGHTENMENT CAPITAL SOLUTIONS FUND SPV I, L.P., in its capacity as a Lender
	By:	/s/ Devin Talbott
	Name:	Devin Talbott
	Title:	Managing Partner
	ENLIGHTENMENT CAPITAL SOLUTIONS FUND -NQ, L.P., in its capacity as a Lender
	By:	/s/ Devin Talbott
	Name:	Devin Talbott
	Title:	Managing Partner
	ENLIGHTENMENT CAPITAL SOLUTIONS FUND I, L.P., in its capacity as a Lender
	By:	/s/ Devin Talbott
	Name:	Devin Talbott
	Title:	Managing Partner

EX-10

Exhibit 10.48

TELOS ID SALE BONUS PLAN

1.          Establishment and Purpose. Telos Identity Management Solutions, LLC, a Delaware limited liability company doing business as Telos ID ("Telos ID"), hereby adopts the Telos ID Sale Bonus Plan (this "Plan"), effective as of August 30, 2016, the date on which this Plan was adopted by Telos ID's Board of Directors (the "Board"). The purpose of this Plan is to provide a long-term incentive program to motivate key executives of Telos ID to participate in the value creation of Telos ID and enjoy the benefits of participation in future increases in the value of Telos ID and its underlying assets. Capitalized terms not defined in this Plan have the meanings ascribed to them in the Second Amended and Restated Operating Agreement of Telos ID, dated as of December 24, 2014.

2.          Eligibility and Participation. All common-law employees of Telos ID who are classified as executives are eligible to participate in this Plan. However, participation in this Plan is limited to the President of Telos ID (the "President") and such other eligible executives selected to participate by the President immediately before the consummation of a transaction described in Section 3.1 (each, a "Participant").

3.          Sale Bonus.

3.1.          Payment Event. Subject to the satisfaction of the conditions in Section 3.3, each Participant will be eligible to receive a bonus payment under this Plan (a "Bonus") upon a Class A Member Exit and/or a Sale, defined as follows:

(a)          A "Class A Member Exit" means a Transfer for value of all Interests of the Class A Member (including a Transfer from the Class A Member to the Class B Member) other than in connection with a Sale (as defined below), provided that the value of Telos ID at the time of Transfer (the "Company Value") is at least $50 million. The Company Value shall be determined in good faith by the Board of Directors of Telos Corporation, which determination shall be binding upon Telos ID and the Participants.

(b)          A "Sale" means any of the following events, provided that the proceeds of the Sale either received by or attributable to Telos ID (the "Sale Proceeds") is at least $50 million:

(i) a sale, exchange, or other disposition of all or substantially all of the assets of Telos ID;

(ii) a Transfer for value of all Interests of all Members to any one Person (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), or more than one Person acting as a group, who is not already a Member as of the date of the Transfer;

(iii) a merger, consolidation, or reorganization of Telos ID with one or more other entities in which Telos ID is not the surviving entity and more than 50% of the combined voting power of all classes of stock of the surviving entity are held by persons or entities who were not Members or affiliates of Telos ID immediately prior to the transaction;

(iv) a sale, exchange, or other disposition of all or substantially all of the assets of Telos Corporation;

(v) any transaction (including without limitation a merger or reorganization in which Telos Corporation is the surviving entity) which results in any person or entity (other than persons who are shareholders or affiliates of Telos Corporation immediately prior to the transaction) owning more than 50% of the combined voting power of all classes of shares of Telos Corporation; or

(vi) a merger, consolidation, or reorganization of Telos Corporation with one or more other entities in which Telos Corporation is not the surviving entity and more than 50% of the combined voting power of all classes of stock of the surviving entity are held by persons or entities who were not shareholders or affiliates of Telos Corporation immediately prior to the transaction.

The amount of the Sale Proceeds either received by or attributable to Telos ID shall be determined in good faith by (a) an agreement reached by the Board of Directors of Telos and the Class B-appointed members of the Board of Directors of Telos ID, or, in the event no such agreement can be reached, then under the terms of the Second Amended and Restated Operating Agreement of Telos ID (as amended from time to time), which determination shall be binding upon Telos, Telos ID and the Participants, or (b) if a Sale occurs subsequent to a Class A Member Exit, the Board of Directors of Telos ID, which determination shall be binding upon the Telos ID and the Participants.

3.2.          Amount of Payment.

(a)          Upon a Class A Member Exit, the total Bonuses payable to all Participants will be an amount equal to 2.5% of the Company Value up to $85 million, plus 4% of the Company Value in excess of $85 million. For example, if a Class A Member Exit occurs when the Company Value of Telos ID is $50 million, the total Bonuses payable to all Participants will be $1.25 million (i.e., .025 × $50 million = $1.25 million); and, if a Class A Member Exit occurs when the Company Value of Telos ID is $125 million, the total Bonuses payable to all Participants will be $3.725 million (i.e., (.025 x $85,000,000) + (.04 x ($125,000,000 - $85,000,000)) = $3,725,000).

(b)          Upon a Sale, the total Bonuses payable to all Participants will be an amount equal to 5.0% of the Sale Proceeds up to $85 million, plus 8.0% of the Sales Proceeds in excess of $85 million or, if a Sale occurs subsequent to a Class A Member Exit, an amount equal to 5.0% of the Sale Proceeds up to $85 million plus 8.0% of the Sales Proceeds in excess of $85 million, less the total Bonuses paid to all Participants pursuant to section 3.2(a) in connection with the prior Class A Member Exit. For example, if a Sale of all or substantially all of the assets of Telos ID results in Sale Proceeds in an amount equal to $50 million, the total Bonuses payable to all Participants will be $2.5 million (i.e., 0.05 × $50 million = $2.5 million);  and, if a Sale of all or substantially all of the assets of Telos ID results in Sale Proceeds in an amount equal to $125 million, the total Bonuses payable to all Participants will be $7.45 million (i.e., (.050 x $85,000,000) + (.08 x ($125,000,000 - $85,000,000)) = $7.45 million); and

2

(c)          By way of further example, if the Sale referred to in the preceding sentence generating Sales Proceeds of $125 million occurs subsequent to a Class A Member Exit in which total Bonuses had been paid out to all Participants pursuant to section 3.2(a) in the amount of $3.725, the total Bonuses payable to all Participants upon the Sale will be $3.725 million (i.e., (.050 x $85,000,000) + (.08 x ($125,000,000 - $85,000,000)) = $7.45 million less $3.725 million).

(d)          The total Bonuses payable to all Participants will be allocated as follows: (i) the President will be entitled to at least 50% of the total; and (ii) the remaining amount will be allocated among other Participants as determined by the President immediately before or coincident with the Class A Member Exit or Sale; provided, however, that the allocation of more than 50% of the total amount of the Bonuses to the President under clause (i) and the allocation of the Bonuses payable under clause (ii) shall be subject to approval by the Chairman of the Board of Directors of Telos Corporation. If the President does not select other Participants, the portion of the total Bonuses otherwise allocable to Participants other than the President will not be reallocated to the President.

3.3.          Conditions to Payment. Upon a Class A Member Exit or Sale described in Section 3.1, a Participant will be eligible to receive a Bonus if all of the following conditions are met:

(a)          the Participant is employed by Telos ID immediately before the Class A Member Exit or Sale; and

(b)          the Participant agrees to any required management contingencies or restrictive covenants negotiated in connection with the Class A Member Exit or Sale that apply to similarly situated executives of Telos ID for a period of up to one year for the President and two years for any other Participant.

3.4.          Time and Form of Payment. Any Bonus will be paid in cash in a lump sum on or before the first regularly scheduled payday after the Class A Member Exit or Sale, subject to any additional true-up payment to reflect an upward adjustment to the Company Value or Sale Proceeds. Any true-up payment will be made on the same schedule and under the same terms and conditions as apply to payments to holders of ownership interests in Telos ID due to the Class A Member Exit or Sale, but in no event later than five years after the consummation of the Class A Member Exit or Sale.

4.          Administration. This Plan shall be administered by the President according to its terms and applicable law. The President is authorized to take the following actions:

(a)          select Participants from among eligible employees according to Section 2;

(b)          determine the portion of the total Bonuses allocable to each Participant other than the President according to Section 3.2;

(c)          adopt rules to interpret and administer this Plan, remedy ambiguities and errors in this Plan, and supply omissions from this Plan;

3

(d)          make determinations case by case, determinations that need not be uniform for similarly situated Participants; and

(e)          delegate authority to any one or more officers or employees of Telos ID.

5.          Miscellaneous.

5.1.          Funding. Bonuses are paid from the general assets of Telos ID, and this Plan creates no interest in any specific assets of Telos ID.

5.2.          No Effect on Benefit Plans. Any Bonus will be excluded from compensation when calculating benefits payable to a Participant under any Telos ID pension or welfare plan, unless the plan specifically says otherwise.

5.3.          Withholding. By participating in this Plan, a Participant authorizes Telos ID to withhold from the Bonus any amount required to satisfy all federal, state, local, or other tax obligations.

5.4.          At-Will Employment. A Participant without an employment agreement is employed "at will" by Telos ID, and nothing in this Plan gives the Participant any right to continue employment with Telos ID.

5.5.          Amendment and Termination. Before the consummation of a Class A Member Exit or Sale, the Board may amend or terminate this Plan at any time without notice or consent of any Participant. After the consummation of a Class A Member Exit or Sale, any amendment that adversely affects the rights of Participants under this Plan requires both Board approval and the prior written consent of a majority affected Participants.

5.6.          Successors. For purposes of this Plan, Telos ID includes any successors or assignees, whether direct or indirect, by purchase, merger, consolidation, or otherwise, to all or substantially all of the business or assets of Telos ID, and these successors and assignees shall perform Telos ID's obligations under this Plan in the same manner and to the same extent required of Telos ID but for the succession or assignment. Upon any transaction to which Telos ID is a party, if the surviving corporation is a subsidiary of another corporation, the ultimate parent corporation of that surviving corporation shall cause the surviving corporation to perform the obligations of Telos ID under this Plan in the same manner and to the same extent required of Telos ID but for the transaction. In such event, the term "Telos ID," as used in this Plan, will mean Telos ID and any successor or assignee (including the ultimate parent corporation of a successor or assignee) to the business or assets of Telos ID who becomes bound by the terms of this Plan.

5.7.          Nontransferability. No Bonus or other right under this Plan may be transferred other than by will or the laws of descent and distribution. Any transfer or attempted transfer of a Bonus or other right under this Plan contrary to this Section 5.7 will be void. If a Participant attempts to transfer a Bonus or other right under this Plan, the President may terminate the Bonus or other right.

4

5.8.          Governing Law; Consent to Jurisdiction. The laws of the Commonwealth of Virginia, without giving effect to principles of conflict of laws, govern all adversarial proceedings arising under this Plan. By accepting a Bonus or exercising any right under this Plan, a Participant consents to jurisdiction of any court located in [Virginia] and waives any right to claim inconvenient forum for any proceeding arising under this Plan.

5.9.          Section 409A Compliance. This Plan is intended to be exempt from or to comply with Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A"), and this Plan is to be interpreted and administered accordingly. Even so, Telos ID and its delegates and agents have (a) no obligation to prevent, minimize, or make a gross-up payment to offset any negative consequences to any Participant under Section 409A and (b) no liability to any Participant for any potential negative consequences.

5.10.          Severability. If any provision of this Plan is held to be unenforceable, then that provision will either be modified to the minimum extent necessary to be enforceable or disregarded if no modification is permitted by law. If an unenforceable provision is modified or disregarded under this Section 5.10, then the rest of this Plan will remain as written.

5

EX-21

Exhibit 21

List of Subsidiaries

Active subsidiaries of the Company as of December 31, 2016:

Name of Subsidiary	State/Country  of Incorporation
Ubiquity.com, Inc.	Delaware
Xacta Corporation	Delaware
Teloworks, Inc.	Delaware
Telos Identity Management Solutions, LLC (DBA Telos ID)	Delaware
Teloworks Philippines, Inc.	Philippines

EX-31

Exhibit 31.1

CERTIFICATION

I, John B. Wood, certify that:

1.    I have reviewed this annual report on Form 10-K 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 the audit committee of registrant's board of directors (or persons performing the equivalent functions):

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:   March 30, 2017

/s/ John B. Wood

John B. Wood

Chief Executive Officer (Principal Executive Officer)

EX-31

Exhibit 31.2

CERTIFICATION

I, Michele Nakazawa, certify that:

1.    I have reviewed this annual report on Form 10-K 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 annual 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 annual 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 the audit committee of registrant's board of directors (or persons performing the equivalent functions):

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:   March 30, 2017

/s/ Michele Nakazawa

Michele Nakazawa

Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Telos Corporation (the "Company") on Form 10-K for the period ending December 31, 2016 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. Section 1350, as adopted pursuant to Section 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; 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:   March 30, 2017

/s/ John B. Wood

John B. Wood

Chief Executive Officer (Principal Executive Officer)

Date:   March 30, 2017

/s/ Michele Nakazawa

Michele Nakazawa

Chief Financial Officer (Principal Financial and Accounting Officer)

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2016	Mar. 24, 2017	Jun. 30, 2016
Entity Information [Line Items]
Entity Registrant Name	TELOS CORP
Entity Central Index Key	0000320121
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Public Float			$ 0
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	FY
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2016
Class A Common Stock [Member]
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		40,238,461
Class B Common Stock [Member]
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		4,037,628

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Revenue (Note 5)
Services	$ 112,881	$ 97,659	$ 103,071
Products	21,987	22,975	24,491
Total Revenue	134,868	120,634	127,562
Costs and expenses
Cost of sales - Services	77,578	73,079	82,481
Cost of sales - Products	13,844	16,882	20,128
Total costs and expenses	91,422	89,961	102,609
Selling, general and administrative expenses	41,334	34,290	36,597
Operating income (loss)	2,112	(3,617)	(11,644)
Other income (expenses)
Non-operating income	18	19	414
Interest expense	(5,465)	(5,639)	(5,370)
Loss before income taxes	(3,335)	(9,237)	(16,600)
(Provision) benefit for income taxes (Note 9)	(334)	(4,265)	5,988
Net loss	(3,669)	(13,502)	(10,612)
Less: Net income attributable to non-controlling interest (Note 2)	(3,506)	(2,438)	(1,676)
Net loss attributable to Telos Corporation	$ (7,175)	$ (15,940)	$ (12,288)

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) [Abstract]
Net loss	$ (3,669)	$ (13,502)	$ (10,612)
Other comprehensive loss:
Foreign currency translation adjustments	(12)	(6)	(3)
Actuarial loss on pension liability adjustments, net of tax	0	(2)	0
Total other comprehensive loss, net of tax	(12)	(8)	(3)
Less: Comprehensive income attributable to non-controlling interest	(3,506)	(2,438)	(1,676)
Comprehensive loss attributable to Telos Corporation	$ (7,187)	$ (15,948)	$ (12,291)

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Current assets (Note 6)
Cash and cash equivalents	$ 659	$ 58
Accounts receivable, net of reserve of $429 and $485, respectively (Note 5)	19,087	19,045
Inventories, net of obsolescence reserve of $1,672 and $1,457, respectively	3,552	2,901
Deferred program expenses	186	734
Other current assets	1,521	3,105
Total current assets	25,005	25,843
Property and equipment (Note 6)
Furniture and equipment	6,912	7,381
Leasehold improvements	2,399	2,418
Property and equipment under capital leases	30,829	30,829
Property and equipment, gross	40,140	40,628
Accumulated depreciation and amortization	(24,023)	(23,366)
Property and equipment, net	16,117	17,262
Goodwill (Note 3)	14,916	14,916
Other intangible assets (Note 3)	0	1,129
Other assets (Note 6)	761	814
Total assets	56,799	59,964
Current liabilities
Accounts payable and other accrued payables (Note 6)	15,317	12,678
Accrued compensation and benefits	8,071	4,755
Deferred revenue	4,900	3,466
Senior credit facility - short-term (Note 6)	0	1,400
Subordinated debt - short-term (Note 5)	3,029	0
Capital lease obligations - short-term	918	827
Other current liabilities	1,406	1,644
Total current liabilities	33,641	24,770
Senior revolving credit facility (Note 6)	0	7,144
Subordinated debt (Note 6)	0	2,500
Capital lease obligations (Note 10)	18,990	19,908
Deferred income taxes (Note 9)	3,391	3,199
Senior redeemable preferred stock (Note 7)	2,092	2,025
Public preferred stock (Note 7)	127,742	123,919
Other liabilities	919	882
Total liabilities	186,775	184,347
Commitments, contingencies and subsequent events (Notes 10 and 13)
Telos stockholders' deficit
Additional paid-in capital	3,229	3,229
Accumulated other comprehensive income	25	37
Accumulated deficit	(135,537)	(128,362)
Total Telos stockholders' deficit	(132,205)	(125,018)
Non-controlling interest in subsidiary (Note 2)	2,229	635
Total stockholders' deficit	(129,976)	(124,383)
Total liabilities, redeemable preferred stock, and stockholders' deficit	56,799	59,964
Class A Common Stock [Member]
Telos stockholders' deficit
Common stock	65	65
Total stockholders' deficit	65	65
Class B Common Stock [Member]
Telos stockholders' deficit
Common stock	13	13
Total stockholders' deficit	$ 13	$ 13

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2016	Dec. 31, 2015
Current assets
Accounts receivable, reserve	$ 429	$ 485
Inventories, obsolescence reserve	$ 1,672	$ 1,457
Class A Common Stock [Member]
Telos stockholders' deficit
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	40,238,461	40,238,461
Common stock, shares outstanding (in shares)	40,238,461	40,238,461
Class B Common Stock [Member]
Telos stockholders' deficit
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	5,000,000	5,000,000
Common stock, shares issued (in shares)	4,037,628	4,037,628
Common stock, shares outstanding (in shares)	4,037,628	4,037,628

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Operating activities:
Net loss	$ (3,669)	$ (13,502)	$ (10,612)
Adjustments to reconcile net loss to cash provided by operating activities:
Stock-based compensation	0	0	12
Dividends of preferred stock as interest expense	3,890	3,889	3,890
Depreciation and amortization	2,898	4,291	4,251
Provision for inventory obsolescence	215	92	1,359
(Benefit) provision for doubtful accounts receivable	(56)	113	51
Amortization of debt issuance costs	65	152	36
Deferred income tax provision (benefit)	192	5,113	(4,035)
Loss on disposal of fixed assets	0	11	56
Changes in assets and liabilities:
Decrease in accounts receivable	14	3,364	23,059
(Increase) decrease in inventories	(866)	352	181
Decrease (increase) in deferred program expenses	548	657	(815)
Decrease (increase) in other current assets and other assets	1,824	1,330	(3,192)
Increase (decrease) in accounts payable and other accrued payables	3,722	(3,840)	(6,490)
Increase (decrease) in accrued compensation and benefits	3,316	552	(1,738)
Increase in deferred revenue	1,434	122	576
Increase (decrease) in other current liabilities	328	27	(405)
Cash provided by operating activities	13,855	2,723	6,184
Investing activities:
Purchases of property and equipment	(624)	(394)	(665)
Cash used in investing activities	(624)	(394)	(665)
Financing activities:
Proceeds from senior credit facilities	70,032	139,072	163,112
Repayments of senior credit facilities	(75,640)	(139,118)	(171,363)
Repayments of term loan	(3,200)	(2,300)	(688)
(Decrease) increase in book overdrafts	(1,083)	(1,298)	1,016
Proceeds from subordinated debt	0	2,500	0
Proceeds from assignment of purchase option under lease	0	0	1,669
Payments under capital lease obligations	(827)	(772)	(779)
Proceeds from sale of Telos ID 10% membership interest	0	2,000	3,000
Distributions to Telos ID Class B member - non-controlling interest	(1,912)	(2,387)	(1,548)
Cash used in financing activities	(12,630)	(2,303)	(5,581)
Increase (decrease) in cash and cash equivalents	601	26	(62)
Cash and cash equivalents, beginning of the year	58	32	94
Cash and cash equivalents, end of year	659	58	32
Cash paid during the year for:
Interest	1,320	1,523	1,497
Income taxes	60	65	879
Noncash:
Interest on redeemable preferred stock	3,890	3,889	3,890
Financing of capital leases	0	0	5,680
Receivable from sale of Telos ID 10% membership interest	$ 0	$ 0	$ 2,000

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT - USD ($) $ in Thousands	Class A Common Stock [Member]	Class B Common Stock [Member]	Additional Paid-In Capital [Member]	Accumulated Other Comprehensive Income [Member]	Accumulated Deficit [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2013	$ 65	$ 13	$ 146	$ 48	$ (100,134)	$ 454	$ (99,408)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income				0	(12,288)	1,676	(10,612)
Sale of Telos ID membership interest	0	0	3,071	0	0	2	3,073
Foreign currency translation loss	0	0	0	(3)	0	0	(3)
Pension liability adjustments							0
Stock-based compensation			12	0	0	0	12
Distributions			0	0	0	(1,548)	(1,548)
Balance at Dec. 31, 2014	65	13	3,229	45	(112,422)	584	(108,486)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income			0	0	(15,940)	2,438	(13,502)
Foreign currency translation loss			0	(6)	0	0	(6)
Pension liability adjustments	0	0	0	(2)	0	0	(2)
Distributions			0	0	0	(2,387)	(2,387)
Balance at Dec. 31, 2015	65	13	3,229	37	(128,362)	635	(124,383)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income					(7,175)	3,506	(3,669)
Foreign currency translation loss				(12)			(12)
Pension liability adjustments							0
Distributions						(1,912)	(1,912)
Balance at Dec. 31, 2016	$ 65	$ 13	$ 3,229	$ 25	$ (135,537)	$ 2,229	$ (129,976)

XML

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2016

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

Business and Organization

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. We own all of the issued and outstanding share capital of Xacta Corporation, a subsidiary that develops, markets and sells government-validated secure enterprise solutions to government and commercial customers. We also own all of the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation. We also have a 50% ownership interest in Telos Identity Management Solutions, LLC ("Telos ID") and a 100% ownership interest in Teloworks, Inc. ("Teloworks").

Principles of Consolidation and Basis of Presentation

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

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

Use of Estimates

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of Public Preferred Stock. Actual results could differ from those estimates.

Revenue Recognition

Revenues are recognized in accordance with FASB ASC 605-10-S99. We consider amounts earned upon evidence that an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. Additionally, revenues on arrangements requiring the delivery of more than one product or service are recognized in accordance with ASC 605-25, "Revenue Arrangements with Multiple Deliverables," which addresses and requires the separation and allocation at the inception of the arrangement of all deliverables based on their relative selling prices. This determination is made first by employing vendor-specific objective evidence ("VSOE"), to the extent it exists, then third-party evidence ("TPE") of selling price, to the extent that it exists. Given the nature of the deliverables contained in our multi-element arrangements, which often involve the design and/or delivery of complex or technical solutions to the government, we have not obtained TPE of selling prices on multi-element arrangements due to the significant differentiation which makes obtaining comparable pricing of products with similar functionality impractical. Therefore we do not utilize TPE.  If VSOE and TPE are not determinable, we use our best estimate of selling price ("ESP") as defined in ASC 605-25, which represents our best estimate of the prices under the terms and conditions of a particular order for the various elements if they were sold on a stand-alone basis.

We recognize revenues for software arrangements upon persuasive evidence of an arrangement, delivery of the software, and determination that collection of a fixed or determinable license fee is probable. Revenues for software licenses sold on a subscription basis are recognized ratably over the related license period. For arrangements where the sale of software licenses are bundled with other products, including software products, upgrades and enhancements, post-contract customer support ("PCS"), and installation, the relative fair value of each element is determined based on VSOE. VSOE is defined by ASC 985-605, "Software Revenue Recognition," and is limited to the price charged when the element is sold separately or, if the element is not yet sold separately, the price set by management having the relevant authority. When VSOE exists for undelivered elements, the remaining consideration is allocated to delivered elements using the residual method. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (1) such VSOE does exist or (2) all elements of the arrangement are delivered. PCS revenues, upon being unbundled from a software license fee, are recognized ratably over the PCS period. Software arrangements requiring significant production, modification, or customization of the software are accounted for in accordance with ASC 605-35 "Construction-Type and Production-Type Contracts."

We may use subcontractors and suppliers in the course of performing contracts and under certain contracts we provide supplier procurement services and materials for our customers. Some of these arrangements may fall within the scope of ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent." We presume that revenues on our contracts are recognized on a gross basis, as we generally provide significant value-added services, assume credit risk, and reserve the right to select subcontractors and suppliers, but we evaluate the various criteria specified in the guidance in making the determination of whether revenue should be recognized on a gross or net basis.

A description of the business lines, the typical deliverables, and the revenue recognition criteria in general for such deliverables follows:

Cyber Operations and Defense – Our Cyber Operations and Defense business line consists of Cyber Security and Secure Mobility solutions areas.

Regarding our deliverables of Cyber Security (formerly Information Assurance) solutions, we provide Xacta IA Manager software and cybersecurity services to our customers. The software and accompanying services fall within the scope of ASC 985-605, "Software Revenue Recognition," as discussed above. We provide consulting services to our customers under either a FFP or T&M basis. Such contracts fall under the scope of ASC 605-10-S99. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones as appropriate under a particular contract, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract.

Regarding our deliverables of Secure Mobility (formerly Secure Networks) solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. The solutions within the Secure Mobility group are generally sold as firm-fixed price ("FFP") bundled solutions. Certain of these networking solutions involve contracts to design, develop, or modify complex electronic equipment configurations to a buyer's specification or to provide network engineering services, and as such fall within the scope of ASC 605-35. Revenue is earned upon percentage of completion based upon proportional performance, such performance generally being defined by performance milestones. Certain other solutions fall within the scope of ASC 605-10-S99, such as resold information technology products, like laptops, printers, networking equipment and peripherals, and ASC 605-25, such as delivery orders for multiple solutions deliverables. For product sales, revenue is recognized upon proof of acceptance by the customer, otherwise it is deferred until such time as the proof of acceptance is obtained. For example, in delivery orders for Department of Defense customers, which comprise the majority of the Company's customers, such acceptance is achieved with a signed Department of Defense Form DD-250 or electronic invoicing system equivalent. Services provided under these contracts are generally provided on a FFP basis, and as such fall within the scope of ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under time-and-materials ("T&M") services contracts based upon specified billing rates and other direct costs as incurred.

Identity Management (formerly Telos ID) – We provide our identity assurance and access management solutions and services and sell information technology products, such as computer laptops and specialized printers, and consumables, such as identity cards, to our customers. The solutions are generally sold as FFP bundled solutions, which would typically fall within the scope of ASC 605-25 and ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred.

IT & Enterprise Solutions (formerly Secure Communications) – We provide the Automated Message Handling System ("AMHS") as well as related services to our customers. The system and accompanying services fall within the scope of ASC 985-605, as fully discussed above. Other services fall within the scope of ASC 605-10-S99 for arrangements that include only T&M contracts and ASC 605-25 for contracts with multiple deliverables such as T&M elements and FFP services.  Under such arrangements, the T&M elements are established by direct costs. Revenue is recognized on T&M contracts according to specified rates as direct labor and other direct costs are incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred.

Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. In the event of a change in total estimated contract cost or profit, the cumulative effect of a change is recorded in the period the change in estimate occurs. To the extent contracts are incomplete at the end of an accounting period, revenue is recognized on the percentage-of-completion method, on a proportional performance basis, using costs incurred in relation to total estimated costs, or costs are deferred as appropriate under the terms of a particular contract. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding overhead and general and administrative expense, is recorded in the period in which the loss is first estimated.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our cash management program utilizes zero balance accounts. Accordingly, all book overdraft balances have been reclassified to accounts payable and other accrued payables, to the extent that availability of funds exists on our revolving credit facility.

Accounts Receivable

Accounts receivable are stated at the invoiced amount, less allowances for doubtful accounts. Collectability of accounts receivable is regularly reviewed based upon managements' 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.

Inventories

Inventories are stated at the lower of cost or net realizable value, where cost is determined on the weighted average method. Substantially all inventories consist of purchased customer 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 is $5.2 million and $4.4 million at December 31, 2016 and 2015, respectively.  As of December 31, 2016, it is management's judgment that we have fully provided for any potential inventory obsolescence.

The components of the allowance for inventory obsolescence are set forth below (in thousands):

	Balance Beginning of Year		Additions Charge to Costs and Expense		Recoveries			Balance End of Year
Year Ended December 31, 2016	$	1,457	$	215	$	--		$	1,672
Year Ended December 31, 2015	$	1,366	$	92	$	(1	)	$	1,457
Year Ended December 31, 2014	$	417	$	1,359	$	(410	)	$	1,366

Property and Equipment

        Property and equipment is recorded at cost. Depreciation is provided on the straight-line method at rates based on the estimated useful lives of the individual assets or classes of assets as follows:

Buildings	20   Years
Machinery and equipment	3-5   Years
Office furniture and fixtures	5   Years
Leasehold improvements	Lesser of life of lease or useful life of asset

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

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is reflected in the consolidated statements of operations. For the years ended December 31, 2016, 2015, and 2014, such amounts are negligible. Expenditures for repairs and maintenance are charged to operations as incurred.

Long-lived assets, such as fixed assets, are reviewed for impairment whenever circumstances indicate that the carrying amount of the asset exceeds its estimated fair value. Considerable management judgment is necessary to estimate its fair value. Accordingly, actual results could differ from such estimates. No events have been identified that caused an evaluation of the recoverability of long-lived assets.

Our policy on internal use software is in accordance with ASC 350, "Intangibles- Goodwill and Other." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. We expensed all such software development costs in 2016, 2015, and 2014, as we believe that such amounts are immaterial.

Depreciation and amortization expense related to property and equipment, including property and equipment under capital leases was $1.8 million, $2.0 million, and $2.0 million for the years ended December 31, 2016, 2015, and 2014.

Income Taxes

We account for income taxes in accordance with ASC 740-10, "Income Taxes."  Under ASC 740-10, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015.  We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability ("hanging credit") related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

We follow the provisions of ASC 74-10 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.

Goodwill and other intangible assets

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

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, Cyber Operations and Defense ("CO&D"), Identity Management, and IT & Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows. In addition, the estimate of the total fair value of our reporting units 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, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair 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.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount is not recoverable. As of December 31, 2016, no impairment charges were taken.

Stock-Based Compensation

Compensation cost is recognized based on the requirements of ASC 718, "Stock Compensation," for all share-based awards granted. Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding.  Such stock is subject to a vesting schedule as follows: 25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis. Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

Research and Development

For all years presented, we charge all research and development costs to expense as incurred. For research and development costs for software to be sold, leased or otherwise marketed, such costs are capitalized once technological feasibility is reached. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified. To date, no such costs have been capitalized, as costs incurred after reaching technological feasibility have been insignificant. During 2016, 2015, and 2014, we incurred salary costs for research and development of approximately $2.6 million, $2.1 million, and $2.2 million, respectively, which are included as part of the selling, general and administrative expense in the consolidated statements of operations.

Earnings (Loss) per Share

As we do not have publicly held common stock or potential common stock, no earnings per share data is reported for any of the years presented.

Comprehensive Income

Comprehensive income includes changes in equity (net assets) during a period from non-owner sources. Our accumulated other comprehensive income was comprised of a loss from foreign currency translation of $82,000 and $70,000 as of December 31, 2016 and 2015, respectively; and actuarial gain on pension liability adjustments in Teloworks of $107,000 as of December 31, 2016 and 2015.

Financial Instruments

We use various methods and assumptions to estimate the fair value of our financial instruments. Due to their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value. The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on market prices for the same or similar issues. See Note 4 – Fair Value Measurements for fair value disclosures of the senior redeemable preferred stock.

Fair value estimates are made at a specific point in time, based on relevant market information. These estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual period beginning after December 15, 2017. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing," which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. These standards can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. We are in the initial stages of this assessment and continue to evaluate the available transition method.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40):  Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The new standard addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The new standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which requires an entity to measure inventory at the lower of cost and net realizable value. The provisions of the ASU are effective for periods beginning after December 15, 2016. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The guidance in this update supersedes the requirements in ASC Topic 840, Leases. The update will require business entities to recognize lease assets and liabilities on the balance sheet and to disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-08, "Revenues from Contract with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. This guidance is effective for interim and annual reporting periods  beginning after December 15, 2017. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In June 2016, 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. The new 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 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 financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments," which intends to reduce the diversity in practice in how certain transactions are classified on the statement of cash flows. This new standard will be effective retrospectively for interim and annual reporting periods beginning after December 31, 2017, and early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

XML

Non-controlling Interests

12 Months Ended

Dec. 31, 2016

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 Investors in exchange for $6 million in cash consideration. In accordance with ASC 505-10, "Equity-Overall," we recognized a gain of $5.8 million. As a result, we owned 60% of Telos ID, and therefore continue 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. Notwithstanding the foregoing, the allocations of profits and losses and distributions (including any distributions that relate to the year ending December 31, 2014, that are paid in a subsequent year) from the Closing Date through and including December 31, 2014, continued to be governed by the operating agreement of Telos ID in effect prior to the Closing Date and allocated based on the percentages of ownership prior to the Closing Date.

As of December 31, 2014, we had received $3 million of the $5 million of consideration for the sale. The remaining $2 million was recorded as a receivable and received in January 2015. Despite the post-Transaction ownership of Telos ID being evenly split at 50% by each member, Telos maintains control of the subsidiary through its holding of three of the five Telos ID board of director seats.

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

● Upon the occurrence of a change in control of the Class A member (as defined in the Operating Agreement, a "Change in Control"), the Class A member has the option to purchase the entire membership interest of the Class B member.

● Upon the occurrence of the following events: (i) the involuntary termination of John B. Wood as CEO and chairman of the Class A member; (ii) the bankruptcy of the Class A member; or (iii) unless the Class A member exercises its option to acquire the entire membership interest of the Class B member upon a Change in Control of the Class A member, the transfer or issuance of more than fifty-one percent (51%) of the outstanding voting securities of the Class A member to a third party, the Class B member has the option to purchase the membership interest of the Class A member; provided, however, that in the event that the Class B member exercises the foregoing option, the Class A Member may then choose to purchase the entire interest of the Class B member.

● In the event that more than fifty percent (50%) of the ownership interests in the Class B member are transferred to persons or individuals (other than members of the immediate family of the initial owners of the Class B member) without the consent of Telos ID, the Class A member has the option to purchase the entire membership interest of the Class B member.

● The Class B member has the option to sell its interest to the Class A member at any time if there is not a letter of intent to sell Telos ID, a binding contract to sell all of the assets or membership interests in Telos ID, or a standstill for due diligence with respect to a sale of Telos ID. Notwithstanding the foregoing, the Class A member will not be obligated to purchase the interest of the Class B member if that purchase would constitute a violation of any existing line of credit available to the Company after giving effect to that purchase and the applicable lender refuses to consent to that purchase or to waive such violation.

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

Pursuant to the Transaction, the Class A and Class B members each owns 50% of Telos ID, as mentioned above, and as such was allocated 50% of the profits, which was $3.5 million and $2.4 million for 2016 and 2015, respectively. Prior to the Transaction, the Class A member owned 60% of Telos ID, as mentioned above, and as such was allocated 60% of the profits, which was $2.5 million for 2014. The Class B member owned 40% of Telos ID prior to the Transaction, and as such was allocated 40% of the profits, which was $1.7 million for 2014.  The Class B member was the non-controlling interest.

Distributions are made to the members only when and to the extent determined by the Telos ID's Board of Directors, in accordance with the Operating Agreement. During the year ended December 31, 2016, 2015, and 2014, the Class B member received a total of $1.9 million, $2.4 million and $1.5 million, respectively, of such distributions.

The following table details the changes in non-controlling interest for the years ended December 31, 2016, 2015, and 2014 (in thousands):

	2016			2015			2014
Non-controlling interest, beginning of period		635		$	584		$	454
Net income		3,506			2,438			1,676
Distributions		(1,912	)		(2,387	)		(1,548	)
Purchase of 10% membership interest		--			--			2
Non-controlling interest, end of period	$	2,229		$	635		$	584

XML

Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2016

Goodwill and Other Intangible Assets [Abstract]

Goodwill and Intangible Assets

Note 3. Goodwill and Other Intangible Assets

The goodwill balance was $14.9 million as of December 31, 2016 and 2015.  Goodwill is subject to annual impairment tests and if triggering events are present before the annual tests, we will assess impairment. As of December 31, 2016, no impairment charges were taken.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets were amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization was based on a forecast of approximately equal annual customer orders over the 5-year period. Amortization expense for 2016, 2015 and 2014 was $1.1 million, $2.3 million, and $2.3 million, respectively. The other intangible assets were fully amortized as of June 30, 2016.

Other intangible assets consist of the following:

	December 31, 2016				December 31, 2015
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Other intangible assets	$	11,286	$	11,286	$	11,286	$	10,157
	$	11,286	$	11,286	$	11,286	$	10,157

XML

Fair Value Measurements

12 Months Ended

Dec. 31, 2016

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 investments using a three-tiered approach. The statement requires fair value measurement to be classified and disclosed in one of the following categories:

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

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

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

As of December 31, 2016 and 2015, we did not have any financial instruments with significant Level 3 inputs and we did not have any financial instruments that are measured at fair value on a recurring basis. Due to the liquid and short-term nature of cash, accounts receivable, and accounts payable, fair value is assumed to approximate book value. We believe the fair value of other debt approximates book value.

As of December 31, 2016 and 2015, the carrying value of the Senior Redeemable Preferred Stock was $2.1 million and $2.0 million, respectively. Since there have been no material modifications to the financial instruments, the estimated fair value of the Senior Redeemable Preferred Stock remains consistent with amounts recorded as of December 31, 2016.

As of December 31, 2016 and 2015, the carrying value of the Company's 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the "Public Preferred Stock") was $127.7 million and $123.9 million, respectively, and the estimated fair market value was $31.9 million and $32.3 million, respectively, based on quoted market prices.

XML

Revenue and Accounts Receivable

12 Months Ended

Dec. 31, 2016

Revenue and Accounts Receivable [Abstract]

Revenue and Accounts Receivable

Note 5. Revenue and Accounts Receivable

Revenue resulting from contracts and subcontracts with the U.S. Government accounted for 96.7%, 97.3%, and 96.1% of consolidated revenue in 2016, 2015, and 2014, respectively. As our primary customer base includes agencies of the U.S. Government, we have a concentration of credit risk associated with our accounts receivable, as 98.0% of our billed accounts receivable were directly with U.S. Government customers. While we acknowledge the potentially material and adverse risk of such a significant concentration of credit risk, our past experience of collecting substantially all of such receivables provide us with an informed basis that such risk, if any, is manageable. We perform ongoing credit evaluations of all of our customers and generally do not require collateral or other guarantee from our customers.  We maintain allowances for potential losses.

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 consolidated balance sheet, a loss on the sale is recorded and the residual amounts 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 year ended December 31, 2016, the Company sold approximately $35.3 million of receivables, and recognized a related loss of approximately $0.2 million in selling, general and administrative expenses for the same period. As of December 31, 2016, the balance of the sold receivables was approximately $1.0 million, and the related deferred price was approximately $0.1 million.

The components of accounts receivable are as follows (in thousands):

	December 31,
	2016			2015
Billed accounts receivable	$	13,164		$	15,340
Unbilled receivables		6,352			4,190
Allowance for doubtful accounts		(429	)		(485	)
	$	19,087		$	19,045

       The activities in the allowance for doubtful accounts are set forth below (in thousands):

	Balance Beginning of Year		Bad Debt Expenses (1)			Recoveries (2)		Balance End of Year
Year Ended December 31, 2016	$	485	$	(56	)	$	--	$	429
Year Ended December 31, 2015	$	372	$	113		$	--	$	485
Year Ended December 31, 2014	$	321	$	51		$	--	$	372

                    (1)          Accounts receivable reserves and reversal of allowance for subsequent collections, net

                    (2)          Accounts receivable written-off and subsequent recoveries, net

Revenue by Major Market and Significant Customers

We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:

	2016				2015				2014
					(dollar amounts in thousands)
Federal	$	130,415	96.7	%	$	117,328	97.3	%	$	122,549	96.1	%
State & Local, and Commercial		4,453	3.3	%		3,306	2.7	%		5,013	3.9	%
Total	$	134,868	100.0	%	$	120,634	100.0	%	$	127,562	100.0	%

XML

Current Liabilities and Debt Obligations

12 Months Ended

Dec. 31, 2016

Current Liabilities and Debt Obligations [Abstract]

Current Liabilities and Debt Obligations

Note 6. Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables

As of December 31, 2016 and 2015, the accounts payable and other accrued payables consisted of $12.1 million and $9.3 million, respectively, in trade account payables and $3.2 million and $3.4 million, respectively, in accrued payables.

Accounts Receivable Purchase Agreement

On July 15, 2016, we entered into an Accounts Receivable Purchase Agreement (the "Purchase Agreement") with Republic Capital Access, LLC ("RCA" or "Buyer"), pursuant to which we may offer for sale, and RCA, in its sole discretion, may purchase, eligible accounts receivable relating to U.S. government prime contracts or subcontracts of the Company (collectively, the "Purchased Receivables"). Upon purchase, RCA becomes the absolute owner of any such Purchased Receivables, which are payable directly to RCA, subject to certain repurchase obligations of the Company. The total amount of Purchased Receivables is subject to a maximum limit of $10 million of outstanding Purchased Receivables (the "Maximum Amount") at any given time. The Purchase Agreement has an initial term expiring on June 30, 2018 and automatically renews for successive 12-month renewal periods unless terminated in writing by either the Company or RCA.

The initial purchase price of a Purchased Receivable is equal to 90% of the face value of the receivable if the account debtor is an agency of the U.S. government, and 85% if the account debtor is not an agency of the U.S. government; provided, however, that RCA has the right to adjust these initial purchase price rates in its sole discretion. After collection by RCA of the portion of a Purchased Receivable in excess of the initial purchase price, RCA shall pay the Company the residual 10% or 15% of such Purchased Receivable, as appropriate, less (i) a discount factor equal to 0.30%, for federal government prime contracts (or 0.56% for non-federal government investment grade account obligors or 0.62% for non-federal government non-investment grade account obligors) of the face amounts of Purchased Receivables; (ii) a program access fee equal to 0.008% of the daily ending account balance for each day that Purchased Receivable are outstanding; (iii) a commitment fee equal to 1% per annum of Maximum Amount minus the amount of Purchased Receivables outstanding; and (iv) fees, costs and expenses relating to the preparation, administration and enforcement of the Purchase Agreement and any other related agreements. At the time the Purchase Agreement was signed, the Company received proceeds in an amount equal to $6.3 million, net of an initial enrollment fee equal to $25,000. Those proceeds were used to repay the outstanding amount under the Facility to Wells Fargo as described below.

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

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

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

Financing and Security Agreement

On July 15, 2016, we entered into a Financing and Security Agreement (the "Financing Agreement") with Action Capital Corporation ("Action Capital"), pursuant to which Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable customer accounts of the Company that have been assigned as collateral to Action Capital (the "Acceptable Accounts"). The maximum outstanding principal amount of advances under the Financing Agreement was $2.5 million, which was subsequently increased to $5 million on September 6, 2016. The Financing Agreement has a term of two years, provided that the Company may terminate it at any time without penalty upon written notice. At the time the Financing Agreement was signed, the Company did not borrow any amounts under the Financing Agreement.

The Company shall pay Action Capital interest on the advances outstanding under the Financing Agreement at a rate equal to the prime rate of Wells Fargo Bank, N.A. in effect on the last business day of the prior month plus 2%, and a monthly fee equal to 0.50%. All interest calculations are based on a year of 360 days. The Company's obligations under the Financing Agreement are secured by certain assets of the Company pertaining to the Acceptable Accounts, including all accounts, accounts receivable, earned and unbilled revenue, contract rights, chattel paper, documents, instruments, general intangibles, reserves, reserve accounts, rebates, books and records, and all proceeds of the foregoing.

Pursuant to the terms of the Financing Agreement, Action Capital shall have full recourse against the Company when an Acceptable Account is not paid in full by the respective customer within 90 days of the date of purchase or if for any reason it ceases to be an Acceptable Account, including the right to charge-back any such Acceptable Account. It is considered an event of default if the Company breaches any covenant or warranty, knowingly provides false or incorrect material information to Action Capital, or otherwise defaults on any of its material obligations under the Financing Agreement or any other material agreements with Action Capital (subject to a cure period). If any such events of default occur, then Action Capital may take certain actions, including declaring any indebtedness immediately due and payable, requiring any customers with Acceptable Accounts to make payments directly to Action Capital, exercising its power of attorney from the Company to take actions in the Company's stead with respect to any of Company's Acceptable Accounts, or terminating the Financing Agreement.

As of December 31, 2016, there were no outstanding borrowings under the Financing Agreement.

In connection with the Purchase Agreement and the Financing Agreement, we terminated our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo"), effective as of July 15, 2016, prior to its maturity date of April 1, 2017, and repaid all amounts outstanding under the Facility; other than (1) the obligations of the Company under the Facility and related loan documents with respect to letters of credits and fees, charges, costs and expenses related thereto, (2) the obligations of the Company under the Facility and related loan documents to reimburse Wells Fargo for costs and expenses that may become due and payable after the date of the termination of the Facility, and (3) any customary contingent indemnification obligations. The Company paid an early termination fee of $100,000, and no other early termination fees or prepayment penalties were incurred by the Company in connection with the termination of the Facility.

Senior Revolving Credit Facility

On August 12, 2015, we amended our revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to July 1, 2016. On November 17, 2015, the Facility was further amended to extend the maturity date to October 1, 2016. As of December 31, 2015, we were in compliance with the Facility's financial covenants, including EBITDA covenants.

As of December 31, 2015, the interest rate on the Facility was 5.75%. We incurred interest expense in the amount of $0.2 million, $0.6 million, and $0.7 million for the years ended December 31, 2016, 2015, and 2014, respectively, on the Facility.

On March 30, 2016 the Facility was amended ("the Seventeenth Amendment") to extend the maturity date to January 1, 2017. The Seventeenth Amendment also amended the terms of the Facility, reducing the total credit available from $20 million to $10 million effective as of the date of the amendment, which more appropriately reflected the Company's projected utilization of the Facility. The Seventeenth Amendment fixed the interest rate at the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%.  The Seventeenth Amendment also increased the minimum excess availability requirement under the revolving component from $1.25 million to $2.0 million, effective as of the date of the amendment, and increased the requirement to $2.5 million, effective July 1, 2016, and $3.0 million, effective November 1, 2016, if the Company did not receive $5 million of equity or subordinated debt investment by June 1, 2016. If such capital investment was not received by June 1, 2016, we would pay a fee of $100,000 to Wells Fargo, which was paid in June 2016. In consideration for the closing of the Seventeenth Amendment, we paid Wells Fargo a fee of $100,000, plus expenses related to the closing.

On May 16, 2016, the Facility was amended to extend the maturity date to April 1, 2017.

At December 31, 2015, we had outstanding borrowings of $8.5 million on the Facility, which included the $3.2 million of term loan, of which $1.4 million was short-term.  At December 31, 2015, we had unused borrowing availability on the Facility of $5.8 million. The effective weighted average interest rates on the outstanding borrowings under the Facility was 6.7% for the year ended December 31, 2015.

On July 15, 2016, the outstanding balance under the Facility was paid in full.

Subordinated Debt

On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with affiliated entities of Mr. John R. C. Porter (together referenced as "Porter").  Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. Telos also entered into Subordination and Intercreditor Agreements (the "Subordination Agreements") with Porter and Wells Fargo, in which the Porter Notes are fully subordinated to the Facility and any subsequent senior lenders (including Action Capital), and payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 for 2016 and 2015, respectively, on the Porter Notes. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.

XML

Redeemable Preferred Stock

12 Months Ended

Dec. 31, 2016

Redeemable Preferred Stock [Abstract]

Redeemable Preferred Stock

Note 7. Redeemable Preferred Stock

Senior Redeemable Preferred Stock

The Senior Redeemable Preferred Stock is senior to all other outstanding equity of the Company, including the Public Preferred Stock. The Series A-1 ranks on a parity with the Series A-2. The components of the authorized Senior Redeemable Preferred Stock are 1,250 shares of Series A-1 and 1,750 shares of Series A-2 Senior Redeemable Preferred Stock, each with $.01 par value. The Senior Redeemable Preferred Stock carries a cumulative per annum dividend rate of 14.125% of its liquidation value of $1,000 per share. The dividends are payable semiannually on June 30 and December 31 of each year. We have not declared dividends on our Senior Redeemable Preferred Stock since its issuance, other than in connection with the redemptions from 2010 to 2013. The liquidation preference of the Senior Redeemable Preferred Stock is the face amount of the Series A-1 and A-2 ($1,000per share), plus all accrued and unpaid dividends.

Due to the terms of the Facility, the Porter Notes, other senior obligations currently or previously in existence, the Senior Redeemable Preferred Stock and applicable provisions of Maryland law governing the payment of distributions, we have been precluded from redeeming the Senior Redeemable Preferred Stock and paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than the redemptions that occurred from 2010 to 2013. In addition, certain holders of the Senior Redeemable Preferred Stock have entered into standby agreements whereby, among other things, those holders will not demand any payments in respect of dividends or redemptions of their instruments and the maturity dates of the instruments have been extended. As a result of such standby agreements, as of December 31, 2016, instruments held by Toxford Corporation ("Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on May 31, 2018. 

At December 31, 2016 and 2015, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 197 shares and 276 shares for Series A-1 and Series A-2, respectively. Due to the limitations, contractual restrictions, and agreements described above, the Senior Redeemable Preferred Stock is classified as noncurrent as of December 31, 2016.

At December 31, 2016 and 2015, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.6 million.  We accrued dividends on the Senior Redeemable Preferred Stock of $67,000 for the years ended December 31, 2016, 2015, and 2014, respectively, which were reported as interest expense. Prior to the effective date of ASC 480-10, "Distinguishing Liabilities from Equity," on July 1, 2003, such dividends were charged to stockholders' deficit.

Public Preferred Stock

A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006.  The Public Preferred Stock was fully accreted as of December 2008.  We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2016 and 2015, was 3,185,586. The Public Preferred Stock is quoted as TLSRP on the OTCQB marketplace and the OTC Bulletin Board.

Since 1991, no dividends were declared or paid on our Public Preferred Stock, based upon our interpretation of restrictions in our Articles of Amendment and Restatement, limitations in the terms of the Public Preferred Stock instrument, specific dividend payment restrictions in the Facility and the Porter Notes to which the Public Preferred Stock is subject, other senior obligations currently or previously in existence, and Maryland law limitations in existence prior to October 1, 2009. Subsequent to the 2009 Maryland law change, dividend payments continue to be prohibited except under certain specific circumstances as set forth in Maryland Code Section 2-311, which the Company did not satisfy as of the measurement dates. Pursuant to the terms of the Articles of Amendment and Restatement, we were scheduled, but not required, to redeem the Public Preferred Stock in five annual tranches during the period 2005 through 2009. However, due to our substantial senior obligations currently or previously in existence, limitations set forth in the covenants in the Facility and the Porter Notes, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were and remain unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock as of the measurement dates. Moreover, the Public Preferred Stock is not payable on demand, nor callable, for failure to redeem the Public Preferred Stock in accordance with the redemption schedule set forth in the instrument. Therefore, we classify these securities as noncurrent liabilities in the consolidated balance sheets as of December 31, 2016 and 2015.

Until July 15, 2016, we were parties with certain of our subsidiaries to the Facility agreement with Wells Fargo. Under the Facility, we agreed that, so long as any credit under the Facility is available and until full and final payment of the obligations under the Facility, we would not make any distribution or declare or pay any dividends (other than common stock) on our stock, or purchase, acquire, or redeem any stock, or exchange any stock for indebtedness, or retire any stock. Additionally, the Porter Notes contain similar prohibitions on dividend payments or stock redemptions.

Accordingly, as stated above, we will continue to classify the entirety of our obligation to redeem the Public Preferred Stock as a long-term obligation. The Porter Notes and the Senior Redeemable Preferred Stock prohibit, among other things, the redemption of any stock, common or preferred, other than as described above. The Public Preferred Stock by its terms cannot be redeemed if doing so would violate the terms of an agreement regarding the borrowing of funds or the extension of credit which is binding upon us or any of our subsidiaries, and it does not include any other provisions that would otherwise require any acceleration of the redemption of or amortization payments with respect to the Public Preferred Stock.  Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from December 31, 2016. This classification is consistent with ASC 210-10, "Balance Sheet" and 470-10, "Debt" and the FASB ASC Master Glossary definition of "Current Liabilities."

ASC 210-10 and the FASB ASC Master Glossary define current liabilities as follows: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. As a balance sheet category, the classification is intended to include obligations for items which have entered into the operating cycle, such as payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale; collections received in advance of the delivery of goods or performance of services; and debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes. Other liabilities whose regular and ordinary liquidation is expected to occur within a relatively short period of time, usually twelve months, are also intended for inclusion, such as short-term debts arising from the acquisition of capital assets, serial maturities of long-term obligations, amounts required to be expended within one year under sinking fund provisions, and agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons.

ASC 470-10 provides the following: The current liability classification is also intended to include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. It is also intended to include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable.

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

We pay dividends on the Public Preferred Stock when and if declared by the Board of Directors. The Public Preferred Stock accrues a semi-annual dividend at the annual rate of 12% ($1.20) per share, based on the liquidation preference of $10 per share and is fully cumulative. Dividends in additional shares of the Public Preferred Stock for 1990 and 1991 were paid at the rate of 6% of a share for each $.60 of such dividends not paid in cash. For the cash dividends payable since December 1, 1995, we have accrued $95.9 million and $92.1 million as of December 31, 2016 and 2015, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for the years ended December 31, 2016, 2015, and 2014, which was recorded as interest expense. Prior to the effective date of ASC 480-10 on July 1, 2003, such dividends were charged to stockholders' accumulated deficit.

XML

Stockholders' Deficit, Option Plans, and Employee Benefit Plan

12 Months Ended

Dec. 31, 2016

Stockholders' Deficit, Option Plans, and Employee Benefit Plan [Abstract]

Stockholders' Deficit, Option Plans, and Employee Benefit Plan

Note 8. Stockholders' Deficit, Option Plans, and Employee Benefit Plan

Common Stock

The relative rights, preferences, and limitations of the Class A common stock and the Class B common stock are in all respects identical. The holders of the common stock have one vote for each share of common stock held.  Subject to the priority rights of the Public Preferred Stock and any series of the Senior Preferred Stock, holders of Class A and Class B common stock are entitled to receive such dividends as may be declared.

Restricted Stock Grants

Since June 2008, we have issued restricted stock (Class A common) to our executive officers, directors and employees. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding.  Such stock is subject to a vesting schedule as follows:  25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services.  In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis.  Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

Stock Options

In 1996, the Board of Directors approved and the shareholders ratified the 1996 Stock Option Plan ("1996 Stock Option Plan"). As determined by the members of the Compensation Committee, we generally grant options under our respective plans at the estimated fair value at the date of grant, based upon all information available to it at the time.

1996 Stock Option Plan

The 1996 Stock Option Plan allowed for the award of options to purchase up to 6,644,974 shares of Class A common stock at an exercise price of not lower than the estimated fair value at the date of grant.  Vesting of the stock options for key employees was based both upon the passage of time, generally four years, and certain key events occurring including an initial public offering or a change in control. The stock options may be exercised over a ten-year period subject to the vesting requirements. Effective May 10, 2004, the 1996 Stock Option Plan was amended by the Board of Directors to increase the total amount of authorized shares of Class A common stock to 7,345,433, an increase of 700,459 shares, to reflect those options granted to Mr. Wood that were not exercised under the 1993 Stock Option Plan. The 1996 Stock Option Plan expired in March 2006, with its remaining 516,000 unissued options canceled. A total of 20,000 options were exercised in 2014. A total of 2,463,500 options were exchanged for restricted stock in June 2008.

A summary of the status of our stock options for the year ended December 31, 2014 is as follows:

	Number of Shares (000's)			Weighted Average Exercise Price
2014  Stock Option Activity
Outstanding at beginning of year		20		$	0.62
Granted		--			--
Exercised		(20	)		0.62
Canceled		--			--
Outstanding at end of year		--			--
Exercisable at end of year		--			--

There were no options outstanding and exercisable at December 31, 2016 and 2015.

Telos Shared Savings Plan

We sponsor a defined contribution employee savings plan (the "Plan") under which substantially all full-time employees are eligible to participate. The Plan holds 3,658,536 shares of Telos Class A common stock. Since no public market exists for Telos Class A common stock, the Trustees of the Plan and their professional advisors undertake an annual evaluation, based upon the most recent audited financial statements. To date, the Plan's trustees have priced the stock at the exact midpoint of the evaluated range of the value of the stock.  We match one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Participant contributions vest immediately, and Company contributions vest at the rate of 20% for each year, with full vesting occurring after completion of five years of service. The Company's matching contributions to the Plan were suspended for 2015. Our total contributions to this Plan for 2016, 2015, and 2014 were $575,000, $0, and $624,000, respectively.

Additionally, effective September 1, 2007, Telos ID sponsors a defined contribution savings plan (the "Telos ID Plan") under which substantially all full-time employees are eligible to participate.   Telos ID matches one-half of employee contributions to the Plan up to a maximum of 2% of such employee's eligible annual base salary. Telos ID's matching contributions to the Telos ID Plan were suspended for 2015. The total 2016, 2015, and 2014 Telos ID contributions to this plan were $96,000, $0, and $83,000, respectively.

XML

Income Taxes

12 Months Ended

Dec. 31, 2016

Income Taxes [Abstract]

Income Taxes

Note 9.  Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2016		2015			2014
Current provision (benefit)
Federal	$	114	$	(902	)	$	(1,759	)
State		28		54			(194	)
Total current		142		(848	)		(1,953	)
Deferred provision (benefit)
Federal		155		4,333			(3,820	)
State		37		780			(215	)
Total deferred		192		5,113			(4,035	)
Total provision (benefit)	$	334	$	4,265		$	(5,988	)

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2016	2015	2014
Computed expected income tax provision	34.0%	34.0%	35.0%
State income taxes, net of federal income tax benefit	0.8	2.1	2.5
Change in valuation allowance for deferred tax assets	(21.5)	(61.3)	0.1
Cumulative deferred adjustments	(0.3)	(0.1)	(0.3)
Provision to return adjustments	(0.4)	1.3	1.1
Other permanent differences	(1.8)	(1.1)	(0.5)
Dividend and accretion on preferred stock	(19.3)	(11.3)	(7.5)
FIN 48 liability	0.7	(0.8)	(0.6)
R&D credit	3.3	1.6	3.0
Other	(0.4)	(0.9)	--
	(4.9)%	(36.5)%	32.8%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	161		$	176
Allowance for inventory obsolescence and amortization		778			623
Accrued liabilities not currently deductible		2,234			2,218
Accrued compensation		1,006			840
Deferred rent		7,682			8,008
Net operating loss carryforwards - federal		1,301			524
Net operating loss carryforwards - state		405			344
Federal tax credit		533			202
Total gross deferred tax assets		14,100			12,935
Less valuation allowance		(10,499	)		(9,027	)
Total deferred tax assets, net of valuation allowance		3,601			3,908
Deferred tax liabilities:
Amortization and depreciation		(2,696	)		(3,307	)
Unbilled accounts receivable, deferred for tax purposes		(787	)		(589	)
Goodwill basis adjustment and amortization		(3,451	)		(3,199	)
Telos ID basis difference		(58	)		(12	)
Total deferred tax liabilities		(6,992	)		(7,107	)
Net deferred tax liabilities	$	(3,391	)	$	(3,199	)

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period
December 31, 2016	$	9,027	$	1,472	$	--		$	10,499
December 31, 2015	$	1,868	$	7,159	$	--		$	9,027
December 31, 2014	$	1,901	$	--	$	(33	)	$	1,868

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

At December 31, 2016, for federal income tax purposes there was approximately $3.8 million net operating loss available to be carried forward to offset future taxable income. These net operating loss carryforwards expire in 2036. Additionally, approximately $3.8 million of alternative minimum tax net operating loss carryforwards are available to offset future alternative minimum taxable income. These alternative minimum tax net operating loss carryforwards also expire in 2036.  In addition, there was approximately $60,000 of alternative minimum tax credit available to be carried forward indefinitely to reduce future regular tax liabilities.

Under the provisions of ASC 740-10, we determined that there were approximately $762,000 and $803,000 of unrecognized tax benefits, including $233,000 and $210,000 of related interest and penalties, required to be recorded in other liabilities as of December 31, 2016 and 2015, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2013 to 2016, has not been extended beyond the applicable statute of limitations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2016			2015			2014
Unrecognized tax benefits, beginning of period	$	803		$	708		$	607
Gross (decreases) increases—tax positions in prior period		(66	)		92			105
Gross increases—tax positions in current period		46			38			47
Settlements		(21	)		(35	)		(51	)
Unrecognized tax benefits, end of period	$	762		$	803		$	708

XML

Commitments

12 Months Ended

Dec. 31, 2016

Commitments and Contingencies [Abstract]

Commitments

Note 10. Commitments

Leases

We lease office space and equipment under noncancelable operating and capital leases with various expiration dates, some of which contain renewal options.

On March 1, 1996, we entered into a 20-year capital lease for a building in Ashburn, Virginia, that serves as our corporate headquarters. We had accounted for this transaction as a capital lease and had accordingly recorded assets and a corresponding liability of approximately $12.3 million. Effective November 1, 2013, this lease was terminated and we entered into a 13-year lease ("the 2013 lease") that would have expired in October 31, 2026. The 2013 lease was treated as a modification in accordance with ASC 840, "Leases". As a result of the 2013 lease, the corresponding capital asset and liability increased by $11.7 million, resulting in a net book value of the capital asset of $13.1 million, and capital obligation of $15.5 million. The 2013 lease included an option to purchase, assign to, or designate a purchaser on June 1, 2014, which required notice of intent to exercise the option by not later than March 31, 2014.

On March 28, 2014, we entered into a definitive agreement with an unrelated third party to assign the purchase option to that third party in return for cash consideration of $1.7 million, payable upon the closing of the purchase transaction, and certain obligations under the agreement, including entering into a new 15-year lease with the third party upon the third party's exercise of the purchase option and purchase of the building from the prior landlord. On March 28, 2014, we provided the prior landlord notice of our assignment and exercise of the purchase option. On May 28, 2014 the third party completed the purchase transaction and the 2013 lease was terminated, with no ongoing obligations, by mutual agreement between us and the prior landlord. On the same day we entered into a new lease ("the 2014 lease") with the third party that expires on May 31, 2029. The 2014 lease was treated as a modification of the prior lease on the property in accordance with ASC 840, and determined to be a capital lease. As a result of the new lease, the corresponding capital asset increased by $5.7 million, resulting in a net book value of the capital asset of $18.3 million and the liability increased by $6.7 million, resulting in a capital obligation of $22.0 million. As part of this treatment, the net cash consideration received in connection with the definitive agreement was treated as a lease incentive that will be amortized over the life of the lease.

The following is a schedule by years of future minimum payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2016 (in thousands):

	Property			Equipment			Total
2017	$	1,899		$	1		$	1,900
2018		1,947			--			1,947
2019		1,995			--			1,995
2020		2,045			--			2,045
2021		2,096			--			2,096
Remainder		17,268			--			17,268
Total minimum obligations		27,250			1			27,251
Less amounts representing interest (ranging from 5.0% to 18.8%)		(7,343	)		--			(7,343	)
Net present value of minimum obligations		19,907			1			19,908
Less current portion		(917	)		(1	)		(918	)
Long-term capital lease obligations at December 31, 2016	$	18,990		$	--		$	18,990

Future minimum lease payments for all noncancelable operating leases at December 31, 2016 are as follows (in thousands):

2017	$	560
2018		491
2019		491
2020		505
2021		502
Remainder		719
Total minimum lease payments	$	3,268

In accordance with the 2014 Lease, the basic rent increases by a fixed 2.5% escalation annually. Rent expense charged to operations totaled $1.7 million, $1.8 million, and $1.1 million for 2016, 2015, and 2014, respectively.

Accumulated amortization for property and equipment under capital leases at December 31, 2016 and 2015 is $15.7 million and $14.5 million, respectively.

Warranties

We provide product warranties for products sold through certain U.S. Government contract vehicles. We accrue a warranty liability at the time that we recognize revenue for the estimated costs that may be incurred in connection with providing warranty coverage. Warranties are valued using historical warranty usage trends; however, if actual product failure rates or service delivery costs differ from estimates, revisions to the estimated warranty liability may be required. Accrued warranties are reported as other current liabilities on the consolidated balance sheets.

	Balance Beginning of Year		Accruals		Warranty Expenses			Balance End of Year
	(amount in thousands)
Year Ended December 31, 2016	$	133	$	279	$	(361	)	$	51
Year Ended December 31, 2015	$	189	$	125	$	(181	)	$	133
Year Ended December 31, 2014	$	113	$	140	$	(64	)	$	189

XML

Certain Relationships and Related Transactions

12 Months Ended

Dec. 31, 2016

Certain Relationships and Related Transactions [Abstract]

Certain Relationships and Related Transactions

Note 11.  Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions between us and certain of our current shareholders and former officers is set forth below.

The brother of our Chairman and CEO, Emmett J. Wood, has been an employee of ours since 1996. The amounts paid to this individual as compensation for 2016, 2015, and 2014 were $401,000, $305,000, and $446,000, respectively.  Additionally, Mr. Wood owned 650,000 shares and 50,000 shares of the Company's Class A and Class B Common Stock, respectively, as of December 31, 2016 and 2015.

On March 31, 2015, the Company entered into the Porter Notes. Mr. Porter and Toxford Corporation, of which Mr. Porter is the sole shareholder, own 39.3% of our Class A Common Stock. Under the terms of the Porter Notes, Porter lent the Company $2.5 million on or about March 31, 2015. According to the terms of the Porter Notes, the outstanding principal sum bears interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015. The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. We incurred interest expense in the amount of $300,000 and $229,000 on the Porter Notes for the years ended December 31, 2016 and 2015, respectively. In accordance with the terms of the Porter Notes, interest has been accrued but was not paid due to restrictions on the payment of interest in the Subordination Agreements.

XML

Summary of Selected Quarterly Financial Data (Unaudited)

12 Months Ended

Dec. 31, 2016

Summary of Selected Quarterly Financial Data (Unaudited) [Abstract]

Summary of Selected Quarterly Financial Data (Unaudited)

Note 12. Summary of Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands):

	Quarters Ended
	March 31			June 30			Sept. 30			Dec. 31
2016
Revenue	$	27,078		$	26,798		$	54,940		$	26,052
Gross profit		10,582			9,452			14,538			8,874
(Loss) income before income taxes and non-controlling interest		(149	)		(1,323	)		1,503			(3,366	)
Net loss attributable to Telos Corporation (1)		(867	)		(1,912	)		(91	)		(4,305	)
2015
Revenue	$	28,019		$	32,028		$	33,662		$	26,925
Gross profit		6,778			7,170			8,674			8,051
Loss before income taxes and non-controlling interest		(3,030	)		(2,564	)		(959	)		(2,684	)
Net loss attributable to Telos Corporation (1)(2)		(2,746	)		(2,408	)		(1,406	)		(9,380	)

(1) Changes in net income are the result of several factors, including seasonality of the government year-end buying season, as well as the nature and timing of other deliverables.

(2) A full valuation allowance was recorded against the Company's deferred tax assets in the fourth quarter of 2015.

XML

Commitments, Contingencies and Subsequent Events

12 Months Ended

Dec. 31, 2016

Commitments, Contingencies and Subsequent Events [Abstract]

Commitments and Contingencies and Subsequent Events

Note 13.  Commitments, Contingencies and Subsequent Events

Financial Condition and Liquidity

As described in Note 6 – Current Liabilities and Debt Obligations, we maintain a Purchase Agreement with RCA and a Financing Agreement with Action Capital. The willingness of RCA to purchase our accounts receivable under the Purchase Agreement and of Action Capital to make advances under the Financing Agreement, and our ability to obtain additional financing, may be limited due to various factors, including the eligibility of our receivables, the status of our business, global credit market conditions, and perceptions of our business or industry by RCA, Action Capital, or other potential sources of financing. If we are unable to maintain the new financing arrangements, we would need to obtain additional credit to fund our future operations. If credit is available in that event, lenders may impose more restrictive terms and higher interest rates that may reduce our borrowing capacity, increase our costs, or reduce our operating flexibility. The failure to maintain, extend, renew or replace our new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results.

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

Additionally, as a  result of operations for 2014 and 2015, and the continued impact of contract delays as well as other government budgetary funding issues, management determined the need to raise additional working capital. Accordingly, in December 2014, we sold 10% of the membership interests in Telos ID to the Telos ID Class B member for $5 million, and, in March 2015, we issued the Porter Notes. As discussed in detail below in Subsequent Events, in January 2017, we borrowed $11 million under a credit agreement with Enlightenment Capital Solutions Fund II, L.P. to raise additional working capital and retire certain long-term obligations. Management currently believes that the Company's existing borrowing capacity under the Purchase Agreement and the Financing Agreement discussed above as well as the proceeds of the January 2017 financing, are sufficient to fund our capital and liquidity needs for the next 12 months.

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

Our working capital was $(8.6) million and $1.1 million as of December 31, 2016 and 2015, respectively. Although no assurances can be given, we expect that our financing arrangements with RCA and Action Capital, collectively, as well as the proceeds of the January 2017 financing discussed further in Subsequent Events below, are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Legal Proceedings

Costa Brava Partnership III, L.P.

As previously reported, on October 17, 2005, Costa Brava Partnership III, L.P. ("Costa Brava"), a holder of Public Preferred Stock, instituted litigation against the Company and certain past and present directors and officers in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). A second holder of the Company's Public Preferred Stock, Wynnefield Small Cap Value, L.P. ("Wynnefield"), subsequently intervened as a co-Plaintiff (Costa Brava and Wynnefield are hereinafter referred to as "Plaintiffs"). On February 27, 2007, Plaintiffs added, as an additional defendant, Mr. John R. C. Porter, a holder of the Company's Common Stock and Senior Redeemable Preferred Stock.

In the litigation, Plaintiffs allege, among other things, that the Company and its officers and directors engaged in tactics to avoid paying dividends on the Public Preferred Stock, that the Company made improper bonus payments or awards to officers and directors, that certain former and present officers and directors breached legal duties or the standard of care that they owed the Company, that the Company improperly paid consulting fees to and engaged in loan transactions with Mr. Porter, that the Company failed to improve on the Company's purported insolvency, that the Company failed to redeem the Public Preferred Stock as alledgedly required by the Company's charter, and shareholder oppression against Mr. Porter.

On December 22, 2005, the Company's Board of Directors established a special litigation committee ("Special Litigation Committee"), composed of certain independent directors, to review and evaluate the matters raised in the litigation. On July 20, 2007, the Special Litigation Committee, in its final report, concluded that the available evidence did not support Plaintiffs' derivative claims and that it was not in the best interests of the Company to pursue such claims in the litigation. On August 24, 2007, the Company moved to dismiss Plaintiffs' derivative claims based upon the report and to dismiss all remaining claims for failure to state a claim. Following an evidentiary hearing, the Circuit Court dismissed all derivative claims based upon the recommendation of the Special Litigation Committee on January 7, 2008.

On February 12, 2008, the Plaintiffs filed a Third Amended Complaint that included both new counts and previously dismissed counts. The Company moved to dismiss or strike the Third Amended Complaint and, on April 15, 2008, the Circuit Court issued an order dismissing with prejudice all counts in the Third Amended Complaint that were not previously disposed of by motion or stipulation. On December 2, 2008, the Company filed a motion for voluntary dismissal of its counterclaim against Plaintiffs (for their interference with the Company's relationship with Wells Fargo) without prejudice. The Circuit Court granted that motion, over Plaintiffs' opposition, on January 23, 2009.

Following Plaintiffs' appeal of the dismissal of their derivative claims and shareholder oppression claim, on September 7, 2012, the Court of Special Appeals of Maryland ruled that the Circuit Court applied an incorrect standard of review to evaluate the conclusions of the Special Litigation Committee. The Court of Special Appeals held that the Circuit Court's dismissal of a shareholder oppression claim (asserted against Mr. Porter) raised an issue of first impression under Maryland law and required further briefing in the Circuit Court. The Court of Special Appeals vacated the decision of the Circuit Court that had been appealed and remanded the case for further consideration and proceedings.

On October 24, 2012, the Company filed a petition for writ of certiorari in the Court of Appeals of Maryland, which was denied on January 22, 2013.

On remand, the Circuit Court held a status and scheduling conference on July 26, 2013, as a result of which the Circuit Court issued a memorandum to counsel setting a briefing schedule to address the motion filed by the Company and other defendants to dismiss or otherwise dispose of the derivative claims as a result of the findings of the Special Litigation Committee in its final report of July 20, 2007. On November 1, 2013, the Defendants filed a Motion to Dismiss the derivative claims under the standard of review dictated by the opinion of the Court of Special Appeals. Plaintiffs filed their Opposition to the Motion on December 23, 2013, and Defendants filed their Reply on January 23, 2014. A hearing on the Motion to Dismiss was held on April 24, 2014.  No decision has been rendered on the Company's motion to dismiss or otherwise dispose of the derivative claims, and the matter remains pending.

On September 17, 2013, the Plaintiffs filed a request for an entry of an order for default as to Mr. Porter, which was denied by the Circuit Court on November 8, 2013. Mr. Porter ultimately filed a motion to dismiss the claim against him on May 13, 2014, raising multiple grounds.  No decision has been rendered on Mr. Porter's motion to dismiss, and the matter remains pending.

As of December 31, 2016, Costa Brava and Wynnefield own 12.7% and 17.3%, respectively, of the outstanding Public Preferred Stock.

No material developments occurred in this litigation in 2016.

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

Hamot et al. v. Telos Corporation

As previously reported, since August 2, 2007, Messrs. Seth W. Hamot and Andrew R. Siegel, principals of Costa Brava Partnership III L.P. ("Costa Brava") and Class D Directors of the Company ("Class D Directors"), have been involved in litigation against the Company in the Circuit Court for Baltimore City, Maryland (the "Circuit Court"). The Class D Directors initially alleged that certain documents and records had not been promptly provided to them and were necessary to fulfill their duties as directors of the Company. Subsequently, the Class D Directors further alleged that the Company had failed to follow certain provisions concerning the noticing of Board committee meetings and the recording of Board meeting minutes and, additionally, that Mr. Wood's service as both CEO and Chairman of the Board was improper and impermissible under the Company's Bylaws.

By way of preliminary injunctions entered on August 28, 2007 and September 24, 2007, the Circuit Court ordered that the Class D Directors are entitled to documents in response to reasonable requests for information pertinent and necessary to perform their duties as members of the Board but, in light of the Costa Brava shareholder litigation, the Company is entitled to designated certain documents as "confidential" or "highly confidential" and to withhold certain documents from the Class D Directors based upon the attorney work product doctrine or attorney-client privilege. Pursuant to the preliminary injunctions, the Class D Directors are also entitled to receive written responses to requests for Board of Directors or Board committee minutes within seven days of any such requests and copies of such minutes within fifteen days of any such requests, as well as written responses to all other requests for information and/or documents related to their duties as directors within seven days of such requests, and all Board of Directors appropriate information and/or documents within thirty days of any such requests.

On April 23, 2008, the Company filed a counterclaim against the Class D Directors for money damages and preliminary and injunctive relief based upon the Class D Directors' interference with, and improper influence of, the Company's independent auditors regarding, among other things, a specific accounting treatment. On June 27, 2008, the Circuit Court granted the Company's motion for preliminary injunction and enjoined the Class D Directors from contacting the Company's auditors until the completion of the Company's Form 10-K for the preceding year. This preliminary injunction expired by its own terms and an appeal from that ordered was held to be moot by the Court of Special Appeals of Maryland.

On April 12, 2010, the Class D Directors filed a motion for the advancement of legal fees and expenses incurred in defense of the Company's counterclaim. On November 3, 2011, the Circuit Court denied the Plaintiffs' motion, as well as the Plaintiffs' motion for partial summary judgment and request for attorneys' fees. On May 21, 2012, the Circuit Court denied Plaintiffs' motion for reconsideration of the same.

Trial on both the Class D Directors' books and records claims and the Company's counterclaims realated to the auditor interference commenced on July 5, 2013, and continued on several days in July 2013. The evidentiary portion of the trial concluded on August 1, 2013, and post-trial briefing concluded on September 16, 2013. The court decision on this matter is still pending and no material developments occurred in this litigation during 2016.

At this stage of the litigation it is impossible to reasonably determine the degree of probability related to the Class D Directors' success in any of their assertions and claims, or whether such success would entitle them to monetary relief. Although there can be no assurance as to the ultimate outcome of these proceedings, the Company and its officers and directors strenuously deny the Class D Directors' claims, and will vigorously defend the matter, and continue to oppose the relief sought.

Other Litigation

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

Subsequent Events

On January 25, 2017, we entered into a Credit Agreement (the "Credit Agreement"), by and among the Company, as borrower, Xacta Corporation, ubIQuity.com, Inc., and Teloworks, Inc., as guarantors (together, the "Guarantors"), Enlightenment Capital Solutions Fund II, L.P., as agent (the "Agent"), and the lenders party thereto (the "Lenders"). The Credit Agreement provides for an $11,000,000 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 Accrual Rate of 13.0% per annum. 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 on the Company's and the Guarantor's collateral (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.

The amount of $1,112,222.22 was netted from the proceeds on the Loan as a prepayment of all interest due and payable at the Accrual Rate during the period from January 25, 2017 to October 31, 2017. A 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 and the Guarantors, 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 issuance of the Warrants was made pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(a)(2) thereof. Each Warrant contains appropriate transfer restriction legends.

Effective February 23, 2017, 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.

XML

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2016

Summary of Significant Accounting Policies [Abstract]

Principles of Consolidation and Basis of Presentation

Principles of Consolidation and Basis of Presentation

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

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

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.

Use of Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions used in the preparation of our consolidated financial statements include revenue recognition, allowance for doubtful accounts receivable, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, income taxes, contingencies and litigation, potential impairments of goodwill and intangible assets, estimated pension-related costs for our foreign subsidiaries and accretion of Public Preferred Stock. Actual results could differ from those estimates.

Revenue Recognition

Revenue Recognition

Revenues are recognized in accordance with FASB ASC 605-10-S99. We consider amounts earned upon evidence that an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. Additionally, revenues on arrangements requiring the delivery of more than one product or service are recognized in accordance with ASC 605-25, "Revenue Arrangements with Multiple Deliverables," which addresses and requires the separation and allocation at the inception of the arrangement of all deliverables based on their relative selling prices. This determination is made first by employing vendor-specific objective evidence ("VSOE"), to the extent it exists, then third-party evidence ("TPE") of selling price, to the extent that it exists. Given the nature of the deliverables contained in our multi-element arrangements, which often involve the design and/or delivery of complex or technical solutions to the government, we have not obtained TPE of selling prices on multi-element arrangements due to the significant differentiation which makes obtaining comparable pricing of products with similar functionality impractical. Therefore we do not utilize TPE.  If VSOE and TPE are not determinable, we use our best estimate of selling price ("ESP") as defined in ASC 605-25, which represents our best estimate of the prices under the terms and conditions of a particular order for the various elements if they were sold on a stand-alone basis.

We recognize revenues for software arrangements upon persuasive evidence of an arrangement, delivery of the software, and determination that collection of a fixed or determinable license fee is probable. Revenues for software licenses sold on a subscription basis are recognized ratably over the related license period. For arrangements where the sale of software licenses are bundled with other products, including software products, upgrades and enhancements, post-contract customer support ("PCS"), and installation, the relative fair value of each element is determined based on VSOE. VSOE is defined by ASC 985-605, "Software Revenue Recognition," and is limited to the price charged when the element is sold separately or, if the element is not yet sold separately, the price set by management having the relevant authority. When VSOE exists for undelivered elements, the remaining consideration is allocated to delivered elements using the residual method. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (1) such VSOE does exist or (2) all elements of the arrangement are delivered. PCS revenues, upon being unbundled from a software license fee, are recognized ratably over the PCS period. Software arrangements requiring significant production, modification, or customization of the software are accounted for in accordance with ASC 605-35 "Construction-Type and Production-Type Contracts."

We may use subcontractors and suppliers in the course of performing contracts and under certain contracts we provide supplier procurement services and materials for our customers. Some of these arrangements may fall within the scope of ASC 605-45, "Reporting Revenue Gross as a Principal versus Net as an Agent." We presume that revenues on our contracts are recognized on a gross basis, as we generally provide significant value-added services, assume credit risk, and reserve the right to select subcontractors and suppliers, but we evaluate the various criteria specified in the guidance in making the determination of whether revenue should be recognized on a gross or net basis.

A description of the business lines, the typical deliverables, and the revenue recognition criteria in general for such deliverables follows:

Cyber Operations and Defense – Our Cyber Operations and Defense business line consists of Cyber Security and Secure Mobility solutions areas.

Regarding our deliverables of Cyber Security (formerly Information Assurance) solutions, we provide Xacta IA Manager software and cybersecurity services to our customers. The software and accompanying services fall within the scope of ASC 985-605, "Software Revenue Recognition," as discussed above. We provide consulting services to our customers under either a FFP or T&M basis. Such contracts fall under the scope of ASC 605-10-S99. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones as appropriate under a particular contract, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract.

Regarding our deliverables of Secure Mobility (formerly Secure Networks) solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. The solutions within the Secure Mobility group are generally sold as firm-fixed price ("FFP") bundled solutions. Certain of these networking solutions involve contracts to design, develop, or modify complex electronic equipment configurations to a buyer's specification or to provide network engineering services, and as such fall within the scope of ASC 605-35. Revenue is earned upon percentage of completion based upon proportional performance, such performance generally being defined by performance milestones. Certain other solutions fall within the scope of ASC 605-10-S99, such as resold information technology products, like laptops, printers, networking equipment and peripherals, and ASC 605-25, such as delivery orders for multiple solutions deliverables. For product sales, revenue is recognized upon proof of acceptance by the customer, otherwise it is deferred until such time as the proof of acceptance is obtained. For example, in delivery orders for Department of Defense customers, which comprise the majority of the Company's customers, such acceptance is achieved with a signed Department of Defense Form DD-250 or electronic invoicing system equivalent. Services provided under these contracts are generally provided on a FFP basis, and as such fall within the scope of ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under time-and-materials ("T&M") services contracts based upon specified billing rates and other direct costs as incurred.

Identity Management (formerly Telos ID) – We provide our identity assurance and access management solutions and services and sell information technology products, such as computer laptops and specialized printers, and consumables, such as identity cards, to our customers. The solutions are generally sold as FFP bundled solutions, which would typically fall within the scope of ASC 605-25 and ASC 605-10-S99. Revenue for services is recognized based on proportional performance, as the work progresses. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred. Revenue is recognized under T&M contracts based upon specified billing rates and other direct costs as incurred.

IT & Enterprise Solutions (formerly Secure Communications) – We provide the Automated Message Handling System ("AMHS") as well as related services to our customers. The system and accompanying services fall within the scope of ASC 985-605, as fully discussed above. Other services fall within the scope of ASC 605-10-S99 for arrangements that include only T&M contracts and ASC 605-25 for contracts with multiple deliverables such as T&M elements and FFP services.  Under such arrangements, the T&M elements are established by direct costs. Revenue is recognized on T&M contracts according to specified rates as direct labor and other direct costs are incurred. For cost plus fixed fee ("CPFF") contracts, revenue is recognized in proportion to the allowable costs incurred unless indicated otherwise in the terms of the contract. Revenue for FFP services is recognized on a proportional performance basis. FFP services may be billed to the customer on a percentage-of-completion basis or based upon milestones, which may approximate the proportional performance of the services under the agreements, as specified in such agreements. To the extent that customer billings exceed the performance of the specified services, the revenue would be deferred.

Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. In the event of a change in total estimated contract cost or profit, the cumulative effect of a change is recorded in the period the change in estimate occurs. To the extent contracts are incomplete at the end of an accounting period, revenue is recognized on the percentage-of-completion method, on a proportional performance basis, using costs incurred in relation to total estimated costs, or costs are deferred as appropriate under the terms of a particular contract. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding overhead and general and administrative expense, is recorded in the period in which the loss is first estimated.

Cash and Cash Equivalents

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our cash management program utilizes zero balance accounts. Accordingly, all book overdraft balances have been reclassified to accounts payable and other accrued payables, to the extent that availability of funds exists on our revolving credit facility.

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 managements' 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.

Inventories

Inventories

Inventories are stated at the lower of cost or net realizable value, where cost is determined on the weighted average method. Substantially all inventories consist of purchased customer 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 is $5.2 million and $4.4 million at December 31, 2016 and 2015, respectively.  As of December 31, 2016, it is management's judgment that we have fully provided for any potential inventory obsolescence.

The components of the allowance for inventory obsolescence are set forth below (in thousands):

	Balance Beginning of Year		Additions Charge to Costs and Expense		Recoveries			Balance End of Year
Year Ended December 31, 2016	$	1,457	$	215	$	--		$	1,672
Year Ended December 31, 2015	$	1,366	$	92	$	(1	)	$	1,457
Year Ended December 31, 2014	$	417	$	1,359	$	(410	)	$	1,366

Property and Equipment

Property and Equipment

        Property and equipment is recorded at cost. Depreciation is provided on the straight-line method at rates based on the estimated useful lives of the individual assets or classes of assets as follows:

Buildings	20   Years
Machinery and equipment	3-5   Years
Office furniture and fixtures	5   Years
Leasehold improvements	Lesser of life of lease or useful life of asset

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

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is reflected in the consolidated statements of operations. For the years ended December 31, 2016, 2015, and 2014, such amounts are negligible. Expenditures for repairs and maintenance are charged to operations as incurred.

Long-lived assets, such as fixed assets, are reviewed for impairment whenever circumstances indicate that the carrying amount of the asset exceeds its estimated fair value. Considerable management judgment is necessary to estimate its fair value. Accordingly, actual results could differ from such estimates. No events have been identified that caused an evaluation of the recoverability of long-lived assets.

Our policy on internal use software is in accordance with ASC 350, "Intangibles- Goodwill and Other." This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. We expensed all such software development costs in 2016, 2015, and 2014, as we believe that such amounts are immaterial.

Depreciation and amortization expense related to property and equipment, including property and equipment under capital leases was $1.8 million, $2.0 million, and $2.0 million for the years ended December 31, 2016, 2015, and 2014.

Income Taxes

Income Taxes

We account for income taxes in accordance with ASC 740-10, "Income Taxes."  Under ASC 740-10, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits.  Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted.  We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized. We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015.  We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability ("hanging credit") related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

We follow the provisions of ASC 74-10 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.

Goodwill and intangible assets

Goodwill and other intangible assets

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

As the result of an acquisition, we record any excess purchase price over the net tangible and identifiable intangible assets acquired as goodwill. An allocation of the purchase price to tangible and intangible net assets acquired is based upon our valuation of the acquired assets. Goodwill is not amortized, but is subject to annual impairment tests. We complete our goodwill impairment tests as of December 31st each year. Additionally, we make evaluations between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation is based on the estimation of the fair values of our three reporting units, Cyber Operations and Defense ("CO&D"), Identity Management, and IT & Enterprise Solutions, of which goodwill is housed in the CO&D reporting unit, in comparison to the reporting unit's net asset carrying values. Our discounted cash flows required management judgment with respect to forecasted revenue streams and operating margins, capital expenditures and the selection and use of an appropriate discount rate. We utilized the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. The net assets attributable to the reporting units are determined based upon the estimated assets and liabilities attributable to the reporting units in deriving its free cash flows. In addition, the estimate of the total fair value of our reporting units 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, 2016. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. Recent operating results have reduced the projection of future cash flow growth potential, which indicates that certain negative potential events, such as a material loss or losses on contracts, or failure to achieve projected growth could result in impairment in the future. We estimate fair 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.

Other intangible assets consist primarily of customer relationship enhancements. Other intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. The amortization is based on a forecast of approximately equal annual customer orders over the 5-year period. Other intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount is not recoverable. As of December 31, 2016, no impairment charges were taken.

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. There were no grants issued in 2016. As of December 31, 2016, there were 19,047,259 shares of restricted stock outstanding.  Such stock is subject to a vesting schedule as follows: 25% of the restricted stock vests immediately on the date of grant, thereafter, an additional 25% will vest annually on the anniversary of the date of grant subject to continued employment or services. In the event of death of the employee or a change in control, as defined by the Telos Corporation 2008 Omnibus Long-Term Incentive Plan or the 2013 Omnibus Long-Term Incentive Plan, all unvested shares shall automatically vest in full. In accordance with ASC 718, we recorded immaterial compensation expense for any of the issuances as the value of the common stock was nominal, based on the deduction of our outstanding debt, capital lease obligations, and preferred stock from an estimated enterprise value, which was estimated based on discounted cash flow analysis, comparable public company analysis, and comparable transaction analysis. Additionally, we determined that a significant change in the valuation estimate for common stock would not have a significant effect on the consolidated financial statements.

Research and Development

Research and Development

For all years presented, we charge all research and development costs to expense as incurred. For research and development costs for software to be sold, leased or otherwise marketed, such costs are capitalized once technological feasibility is reached. Technological feasibility is established when all planning, designing, coding and testing activities have been completed, and all risks have been identified. To date, no such costs have been capitalized, as costs incurred after reaching technological feasibility have been insignificant. During 2016, 2015, and 2014, we incurred salary costs for research and development of approximately $2.6 million, $2.1 million, and $2.2 million, respectively, which are included as part of the selling, general and administrative expense in the consolidated statements of operations.

Earnings (Loss) per Share

Earnings (Loss) per Share

As we do not have publicly held common stock or potential common stock, no earnings per share data is reported for any of the years presented.

Comprehensive Income

Comprehensive Income

Comprehensive income includes changes in equity (net assets) during a period from non-owner sources. Our accumulated other comprehensive income was comprised of a loss from foreign currency translation of $82,000 and $70,000 as of December 31, 2016 and 2015, respectively; and actuarial gain on pension liability adjustments in Teloworks of $107,000 as of December 31, 2016 and 2015.

Financial Instruments

Financial Instruments

We use various methods and assumptions to estimate the fair value of our financial instruments. Due to their short-term nature, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value. The fair value of long-term debt is based on the discounted cash flows for similar term borrowings based on market prices for the same or similar issues. See Note 4 – Fair Value Measurements for fair value disclosures of the senior redeemable preferred stock.

Fair value estimates are made at a specific point in time, based on relevant market information. These estimates are subjective in nature and involve matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual period beginning after December 15, 2017. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing," which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. These standards can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application. We are in the initial stages of this assessment and continue to evaluate the available transition method.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40):  Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." The new standard addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The new standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which requires an entity to measure inventory at the lower of cost and net realizable value. The provisions of the ASU are effective for periods beginning after December 15, 2016. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The guidance in this update supersedes the requirements in ASC Topic 840, Leases. The update will require business entities to recognize lease assets and liabilities on the balance sheet and to disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-08, "Revenues from Contract with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. This guidance is effective for interim and annual reporting periods  beginning after December 15, 2017. We are currently assessing the impact the adoption of this ASU will have on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this update will not have a material impact on our consolidated financial position, results of operations and cash flows.

In June 2016, 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. The new 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 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 financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments," which intends to reduce the diversity in practice in how certain transactions are classified on the statement of cash flows. This new standard will be effective retrospectively for interim and annual reporting periods beginning after December 31, 2017, and early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated financial position, results of operations and cash flows.

XML

Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2016

Summary of Significant Accounting Policies [Abstract]

Allowance for Obsolescent Inventory

The components of the allowance for inventory obsolescence are set forth below (in thousands):

	Balance Beginning of Year		Additions Charge to Costs and Expense		Recoveries			Balance End of Year
Year Ended December 31, 2016	$	1,457	$	215	$	--		$	1,672
Year Ended December 31, 2015	$	1,366	$	92	$	(1	)	$	1,457
Year Ended December 31, 2014	$	417	$	1,359	$	(410	)	$	1,366

Property and Equipment Useful Lives

Buildings	20   Years
Machinery and equipment	3-5   Years
Office furniture and fixtures	5   Years
Leasehold improvements	Lesser of life of lease or useful life of asset

XML

Non-controlling Interests (Tables)

12 Months Ended

Dec. 31, 2016

Non-controlling Interests [Abstract]

Changes in Non-controlling Interest

The following table details the changes in non-controlling interest for the years ended December 31, 2016, 2015, and 2014 (in thousands):

	2016			2015			2014
Non-controlling interest, beginning of period		635		$	584		$	454
Net income		3,506			2,438			1,676
Distributions		(1,912	)		(2,387	)		(1,548	)
Purchase of 10% membership interest		--			--			2
Non-controlling interest, end of period	$	2,229		$	635		$	584

XML

Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2016

Goodwill and Other Intangible Assets [Abstract]

Other Intangible Assets

Other intangible assets consist of the following:

	December 31, 2016				December 31, 2015
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Other intangible assets	$	11,286	$	11,286	$	11,286	$	10,157
	$	11,286	$	11,286	$	11,286	$	10,157

XML

Revenue and Accounts Receivable (Tables)

12 Months Ended

Dec. 31, 2016

Revenue and Accounts Receivable [Abstract]

Accounts Receivable Components

The components of accounts receivable are as follows (in thousands):

	December 31,
	2016			2015
Billed accounts receivable	$	13,164		$	15,340
Unbilled receivables		6,352			4,190
Allowance for doubtful accounts		(429	)		(485	)
	$	19,087		$	19,045

       The activities in the allowance for doubtful accounts are set forth below (in thousands):

Allowance for Doubtful Accounts

	Balance Beginning of Year		Bad Debt Expenses (1)			Recoveries (2)		Balance End of Year
Year Ended December 31, 2016	$	485	$	(56	)	$	--	$	429
Year Ended December 31, 2015	$	372	$	113		$	--	$	485
Year Ended December 31, 2014	$	321	$	51		$	--	$	372

                    (1)          Accounts receivable reserves and reversal of allowance for subsequent collections, net

                    (2)          Accounts receivable written-off and subsequent recoveries, net

Revenue by Customer Sector

We derived substantially all of our revenues from contracts and subcontracts with the U.S. Government. Revenue by customer sector for the last three fiscal years is as follows:

	2016				2015				2014
					(dollar amounts in thousands)
Federal	$	130,415	96.7	%	$	117,328	97.3	%	$	122,549	96.1	%
State & Local, and Commercial		4,453	3.3	%		3,306	2.7	%		5,013	3.9	%
Total	$	134,868	100.0	%	$	120,634	100.0	%	$	127,562	100.0	%

XML

Stockholders' Deficit, Option Plans, and Employee Benefit Plan (Tables)

12 Months Ended

Dec. 31, 2016

Stockholders' Deficit, Option Plans, and Employee Benefit Plan [Abstract]

Status of Stock Options

A summary of the status of our stock options for the year ended December 31, 2014 is as follows:

	Number of Shares (000's)			Weighted Average Exercise Price
2014  Stock Option Activity
Outstanding at beginning of year		20		$	0.62
Granted		--			--
Exercised		(20	)		0.62
Canceled		--			--
Outstanding at end of year		--			--
Exercisable at end of year		--			--

XML

Income Taxes (Tables)

12 Months Ended

Dec. 31, 2016

Income Taxes [Abstract]

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,
	2016		2015			2014
Current provision (benefit)
Federal	$	114	$	(902	)	$	(1,759	)
State		28		54			(194	)
Total current		142		(848	)		(1,953	)
Deferred provision (benefit)
Federal		155		4,333			(3,820	)
State		37		780			(215	)
Total deferred		192		5,113			(4,035	)
Total provision (benefit)	$	334	$	4,265		$	(5,988	)

Reconciliation of Effective Tax Rate

The provision for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,
	2016	2015	2014
Computed expected income tax provision	34.0%	34.0%	35.0%
State income taxes, net of federal income tax benefit	0.8	2.1	2.5
Change in valuation allowance for deferred tax assets	(21.5)	(61.3)	0.1
Cumulative deferred adjustments	(0.3)	(0.1)	(0.3)
Provision to return adjustments	(0.4)	1.3	1.1
Other permanent differences	(1.8)	(1.1)	(0.5)
Dividend and accretion on preferred stock	(19.3)	(11.3)	(7.5)
FIN 48 liability	0.7	(0.8)	(0.6)
R&D credit	3.3	1.6	3.0
Other	(0.4)	(0.9)	--
	(4.9)%	(36.5)%	32.8%

Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	161		$	176
Allowance for inventory obsolescence and amortization		778			623
Accrued liabilities not currently deductible		2,234			2,218
Accrued compensation		1,006			840
Deferred rent		7,682			8,008
Net operating loss carryforwards - federal		1,301			524
Net operating loss carryforwards - state		405			344
Federal tax credit		533			202
Total gross deferred tax assets		14,100			12,935
Less valuation allowance		(10,499	)		(9,027	)
Total deferred tax assets, net of valuation allowance		3,601			3,908
Deferred tax liabilities:
Amortization and depreciation		(2,696	)		(3,307	)
Unbilled accounts receivable, deferred for tax purposes		(787	)		(589	)
Goodwill basis adjustment and amortization		(3,451	)		(3,199	)
Telos ID basis difference		(58	)		(12	)
Total deferred tax liabilities		(6,992	)		(7,107	)
Net deferred tax liabilities	$	(3,391	)	$	(3,199	)

Components of Valuation Allowance

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Recoveries			Balance End of Period
December 31, 2016	$	9,027	$	1,472	$	--		$	10,499
December 31, 2015	$	1,868	$	7,159	$	--		$	9,027
December 31, 2014	$	1,901	$	--	$	(33	)	$	1,868

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on available evidence, realization of deferred tax assets is dependent upon the generation of future taxable income.  We considered projected future taxable income, tax planning strategies, and reversal of taxable temporary differences in making this assessment. As such, we have determined that a full valuation allowance is required as of December 31, 2016 and 2015. We are not able to use temporary taxable differences related to goodwill, as a source of future taxable income. As a result of a full valuation allowance against our deferred tax assets, a deferred tax liability (hanging credit) related to goodwill remains on our consolidated balance sheet at December 31, 2016 and 2015.

Unrecognized Tax Benefits Roll Forward

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2016			2015			2014
Unrecognized tax benefits, beginning of period	$	803		$	708		$	607
Gross (decreases) increases—tax positions in prior period		(66	)		92			105
Gross increases—tax positions in current period		46			38			47
Settlements		(21	)		(35	)		(51	)
Unrecognized tax benefits, end of period	$	762		$	803		$	708

XML

Commitments (Tables)

12 Months Ended

Dec. 31, 2016

Commitments and Contingencies [Abstract]

Future Minimum Payments Under Capital Leases

The following is a schedule by years of future minimum payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2016 (in thousands):

	Property			Equipment			Total
2017	$	1,899		$	1		$	1,900
2018		1,947			--			1,947
2019		1,995			--			1,995
2020		2,045			--			2,045
2021		2,096			--			2,096
Remainder		17,268			--			17,268
Total minimum obligations		27,250			1			27,251
Less amounts representing interest (ranging from 5.0% to 18.8%)		(7,343	)		--			(7,343	)
Net present value of minimum obligations		19,907			1			19,908
Less current portion		(917	)		(1	)		(918	)
Long-term capital lease obligations at December 31, 2016	$	18,990		$	--		$	18,990

Future Minimum Lease Payments for All Noncancelable Operating Leases

Future minimum lease payments for all noncancelable operating leases at December 31, 2016 are as follows (in thousands):

2017	$	560
2018		491
2019		491
2020		505
2021		502
Remainder		719
Total minimum lease payments	$	3,268

Accrued Warranties

Warranties

We provide product warranties for products sold through certain U.S. Government contract vehicles. We accrue a warranty liability at the time that we recognize revenue for the estimated costs that may be incurred in connection with providing warranty coverage. Warranties are valued using historical warranty usage trends; however, if actual product failure rates or service delivery costs differ from estimates, revisions to the estimated warranty liability may be required. Accrued warranties are reported as other current liabilities on the consolidated balance sheets.

	Balance Beginning of Year		Accruals		Warranty Expenses			Balance End of Year
	(amount in thousands)
Year Ended December 31, 2016	$	133	$	279	$	(361	)	$	51
Year Ended December 31, 2015	$	189	$	125	$	(181	)	$	133
Year Ended December 31, 2014	$	113	$	140	$	(64	)	$	189

XML

Summary of Selected Quarterly Financial Data (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2016

Summary of Selected Quarterly Financial Data (Unaudited) [Abstract]

Selected Quarterly Financial Data

Note 12. Summary of Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the previous two fiscal years (in thousands):

	Quarters Ended
	March 31			June 30			Sept. 30			Dec. 31
2016
Revenue	$	27,078		$	26,798		$	54,940		$	26,052
Gross profit		10,582			9,452			14,538			8,874
(Loss) income before income taxes and non-controlling interest		(149	)		(1,323	)		1,503			(3,366	)
Net loss attributable to Telos Corporation (1)		(867	)		(1,912	)		(91	)		(4,305	)
2015
Revenue	$	28,019		$	32,028		$	33,662		$	26,925
Gross profit		6,778			7,170			8,674			8,051
Loss before income taxes and non-controlling interest		(3,030	)		(2,564	)		(959	)		(2,684	)
Net loss attributable to Telos Corporation (1)(2)		(2,746	)		(2,408	)		(1,406	)		(9,380	)

(1) Changes in net income are the result of several factors, including seasonality of the government year-end buying season, as well as the nature and timing of other deliverables.

(2) A full valuation allowance was recorded against the Company's deferred tax assets in the fourth quarter of 2015.

XML

Summary of Significant Accounting Policies (Details)	12 Months Ended
	Dec. 31, 2016 USD ($) Segment shares	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($) Segment
Segment Reporting [Abstract]
Number of reportable segments | Segment	1		1
Inventories [Abstract]
Gross inventory	$ 5,200,000	$ 4,400,000
Allowance for Obsolescent Inventory [Roll Forward]
Balance Beginning of Year	1,457,000	1,366,000	$ 417,000
Additions Charge to Costs and Expense	215,000	92,000	1,359,000
Deductions	0	(1,000)	(410,000)
Balance End of Year	1,672,000	1,457,000	1,366,000
Property, Plant and Equipment [Line Items]
Depreciation and amortization, including capital leases	$ 1,800,000	2,000,000	2,000,000
Goodwill and other intangible assets [Abstract]
Estimated useful life of intangible asset	5 years
Research and Development [Abstract]
Salary costs associated with research and development	$ 2,600,000	2,100,000	$ 2,200,000
Comprehensive Income [Abstract]
Foreign currency translation	82,000	70,000
Gain on pension liability adjustment	$ 107,000	$ 107,000
Buildings [Member]
Property, Plant and Equipment [Line Items]
Property, and equipment, useful lives	20 years
Machinery and Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, and equipment, useful lives	3 years
Machinery and Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, and equipment, useful lives	5 years
Office Furniture and Fixtures [Member]
Property, Plant and Equipment [Line Items]
Property, and equipment, useful lives	5 years
Telos ID [Member]
Business Acquisition [Line Items]
Percentage of ownership	50.00%
Teloworks [Member]
Business Acquisition [Line Items]
Percentage of ownership	100.00%
Restricted Stock Grants [Member]
Restricted Stock Grants [Abstract]
Restricted stock issued and outstanding (in shares) | shares	19,047,259
Restricted stock vested on date of grant	25.00%
Restricted stock vest on anniversary of the date of grant	25.00%

XML

Non-controlling Interests (Details)		1 Months Ended		12 Months Ended
	Dec. 24, 2014 USD ($) Director Subclasses	Apr. 30, 2007 USD ($) Director Subclasses	Apr. 19, 2007	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($)	Apr. 20, 2007 USD ($)	Apr. 11, 2007 USD ($)
Noncontrolling Interest [Line Items]
Percentage of membership interest sold to investor	10.00%
Net loss				$ (3,669,000)	$ (13,502,000)	$ (10,612,000)
Proceeds from sale of membership interest				0	2,000,000	3,000,000
Receivable from sale of membership interest				0	0	2,000,000
Changes in non-controlling interest [Abstract]
Non-controlling interest, beginning of period				635,000	584,000	454,000
Net income				3,506,000	2,438,000	1,676,000
Distributions				(1,912,000)	(2,387,000)	(1,548,000)
Purchase of 10% membership interest				0	0	2,000
Non-controlling interest, end of period				2,229,000	635,000	584,000
Class A Membership Unit [Member]
Noncontrolling Interest [Line Items]
Net loss				3,500,000	2,400,000	2,500,000
Class B Membership Unit [Member]
Noncontrolling Interest [Line Items]
Net loss				$ 3,500,000	$ 2,400,000	1,700,000
Telos ID [Member]
Noncontrolling Interest [Line Items]
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						$ 6,000,000
Recognized gain on sale of membership interests to the Investors		$ 5,800,000
Number of members in board of director | Director	5	5
Number of subclasses of membership units | Subclasses	2	2
Proceeds from sale of membership interest						3,000,000
Receivable from sale of membership interest						$ 2,000,000
Portion of the proceeds attributable to the term loan under loan agreement	$ 1,000,000
Telos ID [Member] | Class A Membership Unit [Member]
Noncontrolling Interest [Line Items]
Percentage of ownership interest owned after transaction	50.00%	60.00%
Percentage of profit and loss allocated	50.00%	60.00%
Number of directors entitled to be appointed | Director	3	3
Telos ID [Member] | Class B Membership Unit [Member]
Noncontrolling Interest [Line Items]
Percentage of ownership interest owned after transaction	50.00%	40.00%
Percentage of profit and loss allocated	50.00%	40.00%
Number of directors entitled to be appointed | Director	2	2

XML

Goodwill and Intangible Assets (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Goodwill and Other Intangible Assets [Abstract]
Goodwill	$ 14,916	$ 14,916
Estimated useful lives customer relationship	5 years
Amortization of intangible assets	$ 1,100	2,300	$ 2,300
Asset impairment charges	0
Indefinite-lived Intangible Assets [Line Items]
Cost	11,286	11,286
Accumulated Amortization	11,286	10,157
Other Intangible Assets [Member]
Indefinite-lived Intangible Assets [Line Items]
Cost	11,286	11,286
Accumulated Amortization	$ 11,286	$ 10,157

XML

Fair Value Measurements (Details) - USD ($) $ / shares in Units, $ in Millions	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 1991	Dec. 31, 1990
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Preferred stock dividend rate per annum	12.00%	12.00%
Senior Redeemable Preferred Stock [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Carrying amount of senior redeemable preferred stock	$ 2.1	$ 2.0
Preferred stock dividend rate per annum	14.125%
Public Preferred Stock [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Preferred stock dividend rate per annum	12.00%	12.00%	6.00%	6.00%
Public preferred stock par value (in dollar per share)	$ 0.01
Carrying value of public preferred stock	$ 127.7	$ 123.9
Estimate of Fair Value, Fair Value Disclosure [Member] | Public Preferred Stock [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Public preferred stock	$ 31.9	$ 32.3

XML

Revenue and Accounts Receivable (Details) - USD ($) $ in Thousands		3 Months Ended								12 Months Ended
		Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2016	Dec. 31, 2015
Accounts Receivable [Line Items]
Concentration risk, percentage										100.00%	100.00%	100.00%
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
Sold receivables during the period										35,300
Loss recognized in selling, general and administrative expenses										200
Balance of sold receivables										1,000
Deferred price related to sold receivables										100
Components of Accounts Receivable [Abstract]
Billed accounts receivable													$ 13,164	$ 15,340
Unbilled receivables													6,352	4,190
Allowance for doubtful accounts		$ (429)			$ (485)	$ (485)			$ (372)	(429)	$ (485)	$ (321)	(429)	(485)
Accounts Receivable, Net, Total													$ 19,087	$ 19,045
Allowance for Doubtful Accounts Receivable [Roll Forward]
Balance Beginning of Year					485				372	485	372	321
Bad Debt Expenses	[1]									(56)	113	51
Deductions	[2]									0	0	0
Balance End of Year		429				485				429	485	372
Revenue by Customer Sector [Abstract]
Revenue		$ 26,052	$ 54,940	$ 26,798	$ 27,078	$ 26,925	$ 33,662	$ 32,028	$ 28,019	$ 134,868	$ 120,634	$ 127,562
Federal [Member]
Accounts Receivable [Line Items]
Concentration risk, percentage										96.70%	97.30%	96.10%
Revenue by Customer Sector [Abstract]
Revenue										$ 130,415	$ 117,328	$ 122,549
Federal [Member] | Revenue from Contracts and Subcontracts [Member]
Accounts Receivable [Line Items]
Concentration risk, percentage										96.70%	97.30%	96.10%
Federal [Member] | Accounts Receivable [Member]
Accounts Receivable [Line Items]
Concentration risk, percentage										98.00%
State & Local, and Commercial [Member]
Accounts Receivable [Line Items]
Concentration risk, percentage										3.30%	2.70%	3.90%
Revenue by Customer Sector [Abstract]
Revenue										$ 4,453	$ 3,306	$ 5,013

[1] Accounts receivable reserves and reversal of allowance for subsequent collections, net

[2] Accounts receivable written-off and subsequent recoveries, net

XML

Current Liabilities and Debt Obligations (Details) - USD ($)					12 Months Ended
	Jul. 15, 2016	Mar. 30, 2016	Mar. 26, 2015	Dec. 24, 2014	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 1991	Dec. 31, 1990	Sep. 06, 2016	Mar. 31, 2015	Apr. 20, 2007
Accounts Payable and Other Accrued Payables [Abstract]
Trade account payables					$ 12,100,000	$ 9,300,000
Accrued trade payables					3,200,000	$ 3,400,000
Senior Revolving Credit Facility [Abstract]
Percentage of membership interest sold to investor				10.00%
Interest rate on credit facility						5.75%
Interest expense					5,465,000	$ 5,639,000	$ 5,370,000
Outstanding borrowing of credit facility						8,500,000
Remaining borrowing capacity						5,800,000
Subordinated debt (Note 6)					0	2,500,000					$ 5,000,000
Interest expense, related party					$ 300,000	$ 229,000
Preferred stock dividend rate per annum					12.00%	12.00%
Common stock held by related parties					39.30%	39.30%
Debt instrument, first interest payment date						Aug. 20, 2015
Debt instrument, last principal and interest payment date						Jul. 01, 2017
Telos ID [Member]
Senior Revolving Credit Facility [Abstract]
Percentage of membership interest sold to investor				10.00%								39.999%
Portion of the proceeds attributable to the term loan under loan agreement				$ 1,000,000
Republic Capital Access LLC [Member] | Accounts Receivable Purchase Agreement [Member]
Accounts Receivable Purchase Agreement [Abstract]
Maximum limit of sold receivables	$ 10,000,000
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%
Proceeds from purchase agreement	$ 6,300,000
Initial enrollment fee	$ 25,000
Republic Capital Access LLC [Member] | Accounts Receivable Purchase Agreement [Member] | US Government Agency [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	$ 2,500,000									$ 5,000,000
Financing agreement term	2 years
Percentage of monthly fee	0.50%
Porter [Member]
Senior Revolving Credit Facility [Abstract]
Interest expense, related party					$ 300,000
Senior Redeemable Preferred Stock [Member]
Senior Revolving Credit Facility [Abstract]
Preferred stock dividend rate per annum					14.125%
Public Preferred Stock [Member]
Senior Revolving Credit Facility [Abstract]
Preferred stock dividend rate per annum					12.00%	12.00%		6.00%	6.00%
Prime Rate [Member] | Action Capital Corporation [Member] | Financing and Security Agreement [Member]
Senior Revolving Credit Facility [Abstract]
Percentage added to reference rate to compute the variable rate	2.00%
Term Loan [Member]
Senior Revolving Credit Facility [Abstract]
Outstanding borrowing of credit facility						$ 3,200,000
Term Loan [Member] | Telos ID [Member]
Senior Revolving Credit Facility [Abstract]
Amount of term loan classified as current liabilty							1,000,000
Short-term liability							2,000,000
Revolving credit [Member]
Financing and Security Agreement [Abstract]
Early termination fee	$ 100,000
Senior Revolving Credit Facility [Abstract]
Maximum revolving credit facility		$ 10,000,000	$ 20,000,000
Equity or subordinated debt		5,000,000
Fee amount would pay if capital investment is not received by specified date		100,000
Fees paid in connection with amendment		100,000
Line of credit sub-line limit						1,000,000					$ 5,000,000
Current line of credit borrowing capacity		2,000,000	$ 1,250,000
Current line of credit borrowing capacity, condition one		2,500,000
Current line of credit borrowing capacity, condition two		$ 3,000,000
Interest expense					$ 200,000	$ 600,000	$ 700,000
Weighted average interest rates on outstanding borrowings						6.70%
Revolving credit [Member] | Prime Rate [Member]
Senior Revolving Credit Facility [Abstract]
Percentage added to reference rate to compute the variable rate		2.25%	2.25%
Revolving credit [Member] | Federal Funds Rate [Member]
Senior Revolving Credit Facility [Abstract]
Percentage added to reference rate to compute the variable rate		2.75%	2.75%
Revolving credit [Member] | 3-Month LIBOR [Member]
Senior Revolving Credit Facility [Abstract]
Percentage added to reference rate to compute the variable rate		3.25%	3.25%			3.75%
Short-term [Member] | Term Loan [Member]
Senior Revolving Credit Facility [Abstract]
Outstanding borrowing of credit facility						$ 1,400,000

XML

Redeemable Preferred Stock (Details)		3 Months Ended	12 Months Ended
	Nov. 30, 1998 shares	Jun. 30, 2006 USD ($)	Dec. 31, 2016 USD ($) $ / shares shares	Dec. 31, 2015 USD ($) shares	Dec. 31, 2014 USD ($) $ / shares shares	Dec. 31, 1991 $ / shares shares	Dec. 31, 1990 Tranche shares	Dec. 31, 2013 shares
Class of Stock [Line Items]
Preferred stock dividend rate per annum			12.00%	12.00%
Dividends Payable | $			$ 3,890,000	$ 3,889,000	$ 3,890,000
Senior Redeemable Preferred Stock [Abstract]
Redeemable preferred stock liquidation value (in dollar per share) | $ / shares			$ 1,000
Common stock held by related parties			39.30%	39.30%
12% Cumulative Exchangeable Redeemable Preferred Stock [Abstract]
Number of shares declared as dividend (in shares)						736,863	736,863
Number of annual tranches during the period | Tranche							5
Senior Redeemable Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock dividend rate per annum			14.125%
Senior Redeemable Preferred Stock [Abstract]
Senior redeemable preferred stock maturity date			May 31, 2018
Percentage of redeemable preferred stock held by related party after redemption					82.70%
Undeclared unpaid dividends | $			$ 1,600,000	$ 1,600,000
Accrued dividends reported as interest expenses | $			$ 67,000	$ 67,000	$ 67,000
Senior Redeemable Preferred Stock [Member] | Toxford [Member]
Senior Redeemable Preferred Stock [Abstract]
Percentage of redeemable preferred stock held by related party after redemption			76.40%
Senior Redeemable Preferred Stock [Member] | Porter [Member]
Senior Redeemable Preferred Stock [Abstract]
Percentage of redeemable preferred stock held by related party after redemption					6.30%
Public Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock authorized (in shares)			6,000,000
Preferred stock par value (in dollar per share) | $ / shares			$ 0.01
Preferred stock dividend rate per annum			12.00%	12.00%		6.00%	6.00%
Dividends Payable | $			$ 95,900,000	$ 92,100,000
Principal and accrued dividends of redeemable preferred stock | $			$ 127,700,000	$ 123,900,000
Public preferred stock, shares retired	410,000
Preferred stock issued and outstanding (in shares)				3,185,586	3,185,586		2,858,723
12% Cumulative Exchangeable Redeemable Preferred Stock [Abstract]
Adjusted accrued accretion of public preferred stock | $		$ 1,500,000
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
Dividends on preferred stock | $			$ 3,800,000	$ 3,800,000	$ 3,800,000
Series A-1 Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock authorized (in shares)			1,250
Preferred stock par value (in dollar per share) | $ / shares			$ 0.01
Series A-1 Preferred Stock [Member] | Senior Redeemable Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock issued and outstanding (in shares)			197					197
Series A-2 Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock authorized (in shares)			1,750
Preferred stock par value (in dollar per share) | $ / shares					$ 0.01
Series A-2 Preferred Stock [Member] | Senior Redeemable Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock issued and outstanding (in shares)			276	276
Class A Common Stock [Member] | Porter [Member]
Senior Redeemable Preferred Stock [Abstract]
Common stock held by related parties					39.30%

XML

Stockholders' Deficit, Option Plans, and Employee Benefit Plan (Details)	1 Months Ended		12 Months Ended
	Jun. 30, 2008 shares	Mar. 31, 2006 shares	Dec. 31, 2016 USD ($) Vote shares	Dec. 31, 2015 USD ($) $ / shares shares	Dec. 31, 2014 USD ($) $ / shares shares	Dec. 31, 2004 $ / shares shares	Dec. 31, 1996	Dec. 31, 2016 shares	Dec. 31, 2014 $ / shares shares	Dec. 31, 2006 shares	May 10, 2004 shares
Common Stock [Abstract]
Number of votes per share | Vote			1
Stock Options [Abstract]
Shares available for issuance (in shares)										6,644,974
Term of stock options							10
Vesting period of stock options			5 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding at beginning of year (in shares)				0	20,000
Granted (in shares)					0
Exercised (in shares)					(20,000)
Cancelled (in shares)					0
Outstanding at end of year (in shares)				0	20,000				0
Exercisable at end of year (in shares)									0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Outstanding at beginning of year (in dollars per share) | $ / shares				$ 0	$ 0.62
Granted (in dollars per share) | $ / shares						$ 0
Exercised (in dollars per share) | $ / shares					0.62
Cancelled (in dollars per share) | $ / shares					0
Outstanding at end of year (in dollars per share) | $ / shares					$ 0
Exercisable at end of year (in dollars per share) | $ / shares									$ 0
Telos Shared Savings Plan [Abstract]
Shares held in defined contribution employee savings plan (in shares)			3,658,536
Employer matching percentage			50.00%
Maximum contribution percentage			2.00%
Annual vesting percentage			20.00%
Contributions to the Plan | $			$ 575,000	$ 0	$ 624,000
Telos ID [Member]
Telos Shared Savings Plan [Abstract]
Employer matching percentage			50.00%
Maximum contribution percentage			2.00%
Contributions to the Plan | $			$ 96,000	$ 0	$ 83,000
1996 Stock Option Plan [Member]
Restricted Stock Grants [Abstract]
Stock options exchanged for restricted stocks (in shares)	2,463,500
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding at beginning of year (in shares)			20,000
Outstanding at end of year (in shares)			20,000	20,000				0
Telos Delaware Stock Incentive Plan [Member]
Restricted Stock Grants [Abstract]
Stock options exchanged for restricted stocks (in shares)	983,379
Xacta Stock Incentive Plan [Member]
Restricted Stock Grants [Abstract]
Stock options exchanged for restricted stocks (in shares)	2,498,564
Restricted Stock [Member]
Restricted Stock Grants [Abstract]
Restricted stock vested on date of grant			25.00%
Restricted stock vest on anniversary of the date of grant			25.00%
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding at end of year (in shares)								19,047,259
Stock Options [Member] | 1996 Stock Option Plan [Member]
Stock Options [Abstract]
Shares available for issuance (in shares)											7,345,433
Vesting period of stock options							4 years
Additional shares authorized (in shares)						700,459
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Exercised (in shares)					20,000
Cancelation of unissued options (in shares)		516,000

XML

Income Taxes (Details) - USD ($)	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013
Operating Loss Carryforwards [Line Items]
Operating loss carryforwards	$ 3,800,000
Alternate minimum tax operating loss carryforwards	3,800,000
Alternate minimum tax credit carryforwards	60,000
Current provision [Abstract]
Federal	114,000	$ (902,000)	$ (1,759,000)
State	28,000	54,000	(194,000)
Total current	142,000	(848,000)	(1,953,000)
Deferred provision (benefit) [Abstract]
Federal	155,000	4,333,000	(3,820,000)
State	37,000	780,000	(215,000)
Total deferred	192,000	5,113,000	(4,035,000)
Total provision	$ 334,000	$ 4,265,000	$ (5,988,000)
Reconciliation of effective tax rate [Abstract]
Computed expected income tax provision	34.00%	34.00%	35.00%
State income taxes, net of federal income tax benefit	0.80%	2.10%	2.50%
Change in valuation allowance for deferred tax assets	(21.50%)	(61.30%)	0.10%
Cumulative deferred adjustments	(0.30%)	(0.10%)	(0.30%)
Provision to return adjustments	(0.40%)	1.30%	1.10%
Other permanent differences	(1.80%)	(1.10%)	(0.50%)
Dividend and accretion on preferred stock	(19.30%)	(11.30%)	(7.50%)
FIN 48 liability	0.70%	(0.80%)	(0.60%)
R&D credit	3.30%	1.60%	3.00%
Other	(0.40%)	(0.90%)	0.00%
Effective income tax rate	(4.90%)	(36.50%)	32.80%
Deferred tax assets [Abstract]
Accounts receivable, principally due to allowance for doubtful accounts	$ 161,000	$ 176,000
Allowance for inventory obsolescence and amortization	778,000	623,000
Accrued liabilities not currently deductible	2,234,000	2,218,000
Accrued compensation	1,006,000	840,000
Deferred rent	7,682,000	8,008,000
Net operating loss carryforwards - federal	1,301,000	524,000
Net operating loss carryforwards - state	405,000	344,000
Federal tax credit	533,000	202,000
Total gross deferred tax assets	14,100,000	12,935,000
Less valuation allowance	(10,499,000)	(9,027,000)
Total deferred tax assets, net of valuation allowance	3,601,000	3,908,000
Deferred tax liabilities [Abstract]
Amortization and depreciation	(2,696,000)	(3,307,000)
Unbilled accounts receivable, deferred for tax purposes	(787,000)	(589,000)
Goodwill basis adjustment and amortization	(3,451,000)	(3,199,000)
Telos ID basis difference	(58,000)	(12,000)
Total deferred tax liabilities	(6,992,000)	(7,107,000)
Net deferred tax liabilities	(3,391,000)	(3,199,000)
Unrecognized tax benefits [Roll Forward]
Unrecognized tax benefits, beginning of period	803,000	708,000	$ 607,000
Gross increases-tax positions in prior period		92,000	105,000
Gross increases-tax positions in prior period	(66,000)
Gross increases-tax positions in current period	46,000	38,000	47,000
Settlements	(21,000)	(35,000)	(51,000)
Unrecognized tax benefits, end of period	762,000	803,000	708,000	$ 607,000
Interest and penalties	233,000	210,000
Valuation Allowance of Deferred Tax Assets [Member]
Valuation and Qualifying Accounts Disclosure [Line Items]
Balance Beginning of Period	9,027,000	1,868,000	1,901,000
Additions	1,472,000	7,159,000		0
Deductions	0	0	(33,000)
Balance End of Period	$ 10,499,000	$ 9,027,000	$ 1,868,000	$ 1,901,000

XML

Commitments (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 1996
Property Subject to or Available for Operating Lease [Line Items]
Term of lease			15 years
Capital leased property	$ 30,829	$ 30,829
Proceeds from assignment of purchase option under lease	0	0	$ 1,669
Increase in capital leased property			5,700
Capital lease obligations			22,000
Increase in capital lease obligations			6,700
Net book value of capital asset			18,300
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
2015	1,900
2016	1,947
2017	1,995
2018	2,045
2019	2,096
Remainder	17,268
Total minimum obligations	27,251
Less amounts representing interest (ranging from 5.8% to 18.8%)	(7,343)
Net present value of minimum obligations	19,908
Less current portion	(918)	(827)
Capital lease obligations	18,990	19,908
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2015	560
2016	491
2017	491
2018	505
2019	502
Remainder	719
Total minimum lease payments	3,268
Rent expense charged to operations	1,700	1,800	1,100
Movement in Standard and Extended Product Warranty, Increase (Decrease) [Roll Forward]
Balance Beginning of Year	133	189		$ 113
Accruals	279	125		140
Warranty Expenses	(361)	(181)		$ (64)
Balance End of Year	$ 51	133	189
Capital Lease Obligations [Member]
Property Subject to or Available for Operating Lease [Line Items]
Proceeds from assignment of purchase option under lease			$ 1,700
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
Annual rent increase percentage	2.50%
Accumulated amortization for property and equipment under capital leases	$ 15,700	$ 14,500
Capital Lease Obligations [Member] | Minimum [Member]
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
Interest rate percentage	5.00%
Capital Lease Obligations [Member] | Maximum [Member]
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
Interest rate percentage	18.80%
Property [Member]
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
2015	$ 1,899
2016	1,947
2017	1,995
2018	2,045
2019	2,096
Remainder	17,268
Total minimum obligations	27,250
Less amounts representing interest (ranging from 5.8% to 18.8%)	(7,343)
Net present value of minimum obligations	19,907
Less current portion	(917)
Capital lease obligations	18,990
Property [Member] | Capital Lease Obligations [Member]
Property Subject to or Available for Operating Lease [Line Items]
Term of lease				13 years	20 years
Capital leased property					$ 12,300
Increase in capital leased property				$ 11,700
Capital lease obligations				15,500	$ 12,300
Net book value of capital asset				$ 13,100
Equipment [Member]
Capital Leases, Future Minimum Payments, Present Value of Net Minimum Payments, Fiscal Year Maturity [Abstract]
2015	1
2016	0
2017	0
2018	0
2019	0
Remainder	0
Total minimum obligations	1
Less amounts representing interest (ranging from 5.8% to 18.8%)	0
Net present value of minimum obligations	1
Less current portion	(1)
Capital lease obligations	$ 0

XML

Certain Relationships and Related Transactions (Details) - USD ($)	12 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Related Party Transaction [Line Items]
Common stock held by related parties	39.30%	39.30%
Proceeds from related party, debt		$ 2,500,000
Interest expense, related party	$ 300,000	$ 229,000
Debt instrument, fixed interest rate		12.00%
Debt instrument, last principal and interest payment date		Jul. 01, 2017
Debt instrument, first interest payment date		Aug. 20, 2015
Emmett Wood [Member]
Related Party Transaction [Line Items]
Compensation to related parties	$ 401,000	$ 305,000	$ 446,000
Emmett Wood [Member] | Class A Common Stock [Member]
Related Party Transaction [Line Items]
Number of shares held by related party (in shares)	650,000	650,000
Emmett Wood [Member] | Class B Common Stock [Member]
Related Party Transaction [Line Items]
Number of shares held by related party (in shares)	50,000	50,000

XML

Summary of Selected Quarterly Financial Data (Unaudited) (Details) - USD ($) $ in Thousands	3 Months Ended																12 Months Ended
	Dec. 31, 2016		Sep. 30, 2016		Jun. 30, 2016		Mar. 31, 2016		Dec. 31, 2015		Sep. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Summary of Selected Quarterly Financial Data (Unaudited) [Abstract]
Revenue	$ 26,052		$ 54,940		$ 26,798		$ 27,078		$ 26,925		$ 33,662		$ 32,028		$ 28,019		$ 134,868	$ 120,634	$ 127,562
Gross profit	8,874		14,538		9,452		10,582		8,051		8,674		7,170		6,778
Loss before income taxes and non-controlling interest	(3,366)		1,503		(1,323)		(149)		(2,684)		(959)		(2,564)		(3,030)		(3,335)	(9,237)	(16,600)
Net loss attributable to Telos Corporation (1)(2)	$ (4,305)	[1]	$ (91)	[1]	$ (1,912)	[1]	$ (867)	[1]	$ (9,380)	[1],[2]	$ (1,406)	[1],[2]	$ (2,408)	[1],[2]	$ (2,746)	[1],[2]	$ (7,175)	$ (15,940)	$ (12,288)

[1] Changes in net income are the result of several factors, including seasonality of the government year-end buying season, as well as the nature and timing of other deliverables.

[2] A full valuation allowance was recorded against the Company's deferred tax assets in the fourth quarter of 2015.

XML

Commitments, Contingencies and Subsequent Events (Details) - USD ($)		2 Months Ended	12 Months Ended
	Jan. 25, 2017	Mar. 30, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 24, 2014	Apr. 20, 2007
Financial Condition and Liquidity [Abstract]
Percentage of trade account receivable collateralized under the facility			85.00%
Working capital			$ (8,600,000)	$ 1,100,000
Legal Proceedings [Line Items]
Percentage of membership interest sold to investor						10.00%
Proceeds from sale of Telos ID 10% membership interest			$ 0	$ 2,000,000	$ 3,000,000
Subsequent Event [Line Items]
Maturity date				Jul. 01, 2017
Subsequent Events [Member] | Enlightenment Capital Solutions Fund II LP [Member]
Subsequent Event [Line Items]
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
Subsequent Events [Member] | Term loan [Member] | Enlightenment Capital Solutions Fund II LP [Member]
Subsequent Event [Line Items]
Long term debt	$ 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 during continuance of an Alternate Interest Rate Event	11.50%
Number of days prior written notice		30 days
Proceeds from loan prepayment	$ 1,112,222.22
Subsequent Events [Member] | Term loan [Member] | Maximum [Member] | Enlightenment Capital Solutions Fund II LP [Member]
Subsequent Event [Line Items]
Monthly accrued interest rate	10.00%
Costa Brava [Member]
Legal Proceedings [Line Items]
Percentage of public preferred stock owned			12.70%
Wynnefield [Member]
Legal Proceedings [Line Items]
Percentage of public preferred stock owned			17.30%
Telos ID [Member]
Legal Proceedings [Line Items]
Percentage of membership interest sold to investor						10.00%	39.999%
Proceeds from sale of Telos ID 10% membership interest					$ 3,000,000
Telos ID Class B [Member]
Legal Proceedings [Line Items]
Percentage of membership interest sold to investor			10.00%
Proceeds from sale of Telos ID 10% membership interest			$ 5,000,000