UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934
       For the fiscal year ended December 31, 2014
 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, 2014:  Not applicable

As of March 24, 2015, 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.
DOCUMENTS   INCORPORATED 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 13, 2015.
1
EXPLANATORY NOTE

Telos Corporation is filing this Amendment No. 1 (this "Form 10-K/A") to its Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the "Original Form 10-K"), as originally filed with the Securities and Exchange Commission on March 31, 2015. This Form 10-K/A, which replaces in its entirety the Original Form 10-K, is being filed to correct the following typographical and formatting errors found in the Original Form 10-K that occurred when converting the document for filing with the SEC:

1.
The Consolidated Statements of Operations.  The "Gain on early extinguishment of debt" for the year ended December 31, 2012 is revised from $5,187,000 to $5,187.
2.
The Consolidated Balance Sheets.
·
The "Deferred income taxes – long-term" as of December 31, 2014 is revised from $1 to $910.
·
The "Deferred income taxes" under current liabilities is revised from $25,000 to $25.
·
The "Deferred income taxes" is revised from $169,000 to $169.
3.
Note 9 – Income Taxes.  The "Telos ID basis difference" under deferred tax liabilities is revised from $(45,000) to $(45).  The "period for which tax years are open" is revised from "2010 to 2013" to "2011 to 2014."
4.
Note 6 – Current Liabilities and Debt Obligations.  The "Total" short-term term loan in the maturities of the Facility table is revised from $2,000 to $2,300. The "principal will be repaid in quarterly installments" is revised from $250,000 to $350,000.

This Form 10-K/A reflects information as of the original filing date of the Original Form 10-K, does not reflect events occurring after that date and does not modify or update in any way disclosures or forward-looking statements made in the Original Form 10-K. No other substantive changes have been made to the Original Form 10-K.
 
 
TABLE OF CONTENTS



Item
 
Page
     
PART I
 
     
   
PART II
 
   
   
PART III
 
   
   
PART IV
 
   
 
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 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 74.9% 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 secure critical assets by protecting communications, systems, networks, and access.

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.

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 and enhance the communications of our customers through the development and delivery of our Telos Secure Information eXchange (T-6) platform for unified communication and collaboration. T-6 includes 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.

We protect the systems of our customers through the development and delivery of our Xacta IA Manager software ("Xacta"). Our Xacta solution is the dominant provider of continuous certification and is used throughout the Department of Defense, intelligence communities and civilian government. To date, we have performed over 5,100 certifications and our product has been adopted as the risk management framework for numerous enterprises.

We deploy, protect and extend the networks of our customers around the world, as well as secure the communications on the network. We also empower our customers with advanced applications that leverage mobile devices and multi-user, multi-touch interfaces to put mission-critical information literally at users' fingertips.

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 premier federal identity application, which has issued more than 35,000,000 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 472,000,000 scans by more than 2,600,000 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 rapid development and continuous innovation in an effort to keep pace with the dynamic and evolving nature of our customers' requirements.  

Our IT solutions consist of the following:

•
Cyber Operations and Defense – Secure wired and wireless network solutions for DoD and other federal agencies. We provide an extensive range of wired and wireless voice, data, and video secure network solutions and mobile application development to support defense and civilian missions. Our software products and consulting services automate, streamline, and enforce IT security and risk management processes enterprise-wide. We offer information assurance consulting services and Xacta brand GRC (governance, risk, and compliance) solutions to protect and defend IT systems, ensuring their availability, integrity, authentication, and confidentiality.

•
Secure Communications – The next-generation messaging solution supporting warfighters throughout the world.  Telos Secure Information eXchange (T-6) and the AMHS platform offer secure, automated, Web-based capabilities for distributing and managing enterprise messages formatted for the Defense Messaging System as well as collaborating in real-time through video, text, whiteboarding, and document sharing.

•
Telos ID – End-to-end logical and physical security from the gate to the network. Our identity management solutions provide control of physical access to bases, offices, workstations, and other facilities, as well as control of logical access to databases, host systems, and other IT resources.

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 and/or copyright protection on our products and processes 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 2014, 2013, and 2012, the Company's revenue derived from firm fixed-price contracts was 74.9%, 84.1%, and 82.7%, respectively, cost plus contracts was 15.4%, 8.0%, and 9.7%, respectively, and time-and-material contracts was 9.7%, 7.9%, and 7.6%, respectively.

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:

   
2014
   
2013
   
2012
 
           
(dollar amounts in thousands)
         
                         
Federal
 
$
122,549
     
96.1
%
 
$
203,917
     
98.3
%
 
$
224,010
     
99.1
%
Commercial
   
5,013
     
3.9
%
   
3,477
     
1.7
%
   
2,086
     
0.9
%
                                                 
Total
 
$
127,562
     
100.0
%
 
$
207,394
     
100.0
%
 
$
226,096
     
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, 2014, we employed 538 people, which includes 41 from Teloworks, and 73 from Telos ID.  Of our employees, 404 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.

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 U.S. generally accepted accounting principles (GAAP) 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, 2014 and 2013 was $68.3 million and $95.3 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.

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 availability on our revolving credit facility or sufficient access to capital markets to replace that facility would have a significant impact on our business.
We maintain a revolving credit facility (the "Facility") with Wells Fargo Capital Finance, Inc. Borrowings under the Facility are collateralized by substantially all of our assets including inventory, equipment, and accounts receivable. The amount of available borrowings fluctuates 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 provides us with virtually all of the liquidity we require to meet our operating, investing and financing needs. Therefore maintaining sufficient availability on the Facility is the most critical factor in our liquidity. 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 the Facility. 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 availability on the Facility 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 availability 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 on the Facility unless the slow-down was material in amount and occurred over an extended period of time. Any of the examples described above could have an impact on the Facility, and therefore our liquidity.

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 domestic programs continue to put pressure on all areas of discretionary spending, which could ultimately impact the defense budget.

U.S. Government appropriations have and likely will continue to be affected by larger U.S. Government budgetary issues and related legislation. In 2011, the Congress enacted the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012 (BCA), and the Bipartisan Budget Act of 2013. Pursuant to the terms of the BCA, a sequestration went into effect on March 1, 2013 resulting in a 7.8% reduction to the DoD budget for fiscal year (FY) 2013 to $495.5 billion, excluding funding for military personnel. The FY 2014 DoD base budget was essentially flat at $496 billion and FY 2015 remains at a similar level.

Unless Congress and the Executive Office of the President agree to further amend or revoke the BCA, the DoD base budget is expected to increase very modestly to approximately $500 billion for FY 2016. In the years beyond FY 2016, the BCA permits annual increases for DoD base budget funding of about 2.4 percent with such caps remaining in effect through FY 2023. The Executive Office of the President has publicly signaled its intent to submit budget requests that are significantly higher than the BCA caps, as it did in submitting the FY 2016 budget request and the associated FY 2016 FYDP on February 2, 2015 with all years exceeding the caps under the BCA. Such levels of DoD budget funding would require the Congress to enact legislation to raise the BCA caps. If DoD appropriations exceed the BCA caps in any fiscal year through FY 2023, an across-the-board sequestration would go into effect, as occurred in FY 2013. Conversely, the Congress could choose to reduce any above-BCA cap budget request, as it did for FY 2014 appropriations.

In addition, the U.S. Government has, on a number of occasions, been unable to complete its budget process before the end of its fiscal year (September 30), which resulted in it operating under a Continuing Resolution for extended periods, as well as a brief partial shutdown of the U.S. Government in October 2013. As a result, 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.
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 74.9% of our 2014 revenues, we receive a fixed price irrespective of the actual costs we incur and, consequently, we carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of the program can be highly variable, uncertain and difficult to estimate. Under cost reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or eliminated. Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns. Under both types of contracts, if we are unable to control costs or if our initial cost estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations.
We depend on third parties in order to fully perform under our contracts and the failure of a third party to perform could have an adverse impact on our earnings .
We rely on subcontractors and other companies to provide raw materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally, we rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers. We depend on these subcontractors and vendors to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. If one or more of our subcontractors or suppliers is unable to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services, our ability to perform our obligations as a prime contractor may be adversely affected.

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

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.

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

Not applicable to us as we are not an "accelerated filer" or "large accelerated filer" as such terms are defined in Rule 12b-2 under the Exchange Act or a "well-known seasoned issuer" as defined in Rule 405 of the Securities Act.

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, 2015.

We lease additional office space in five separate facilities located in Alabama, California, Colorado, Maryland, and New Jersey 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.

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, 2015, there were 202 holders of our Class A Common Stock and 10 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, 2014, there were 40,238,461 Class A and 4,037,628 Class B Common shares issued and outstanding.

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,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(amounts in thousands)
 
Sales
 
$
127,562
   
$
207,394
   
$
226,096
   
$
189,888
   
$
225,797
 
Operating (loss) income
   
(11,644
)
   
6,111
     
17,700
     
12,687
     
15,006
 
(Loss) income before income taxes
   
(16,600
)
   
867
     
16,725
     
6,741
     
8,952
 
Net (loss) income attributable to Telos Corporation
   
(12,288
)
   
(2,618
)
   
7,435
     
1,454
     
3,047
 


FINANCIAL CONDITION

   
As of December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(amounts in thousands)
 
Total assets
 
$
73,820
   
$
88,609
   
$
79,156
   
$
89,837
   
$
74,804
 
Senior credit facility, long-term (1)
   
8,590
     
19,141
     
18,559
     
17,501
     
13,786
 
Note payable (1)
   
----
     
----
     
----
     
12,056
     
----
 
Capital lease obligations, long-term (2)
   
20,735
     
14,901
     
3,803
     
4,948
     
5,950
 
Senior redeemable preferred stock (3)
   
1,958
     
1,891
     
4,010
     
8,227
     
10,190
 
Public preferred stock (3)
   
120,097
     
116,274
     
112,451
     
108,628
     
104,806
 


(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 7 to the Consolidated Financial Statements in Item 8 regarding our redeemable preferred stock.


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 – Secure wired and wireless network solutions for Department of Defense ("DoD") and other federal agencies. We provide an extensive range of wired and wireless voice, data, and video secure network solutions and mobile application development to support defense and civilian missions. Our software products and consulting services automate, streamline, and enforce IT security and risk management processes enterprise-wide. We offer information assurance consulting services and Xacta brand GRC (governance, risk, and compliance) solutions to protect and defend IT systems, ensuring their availability, integrity, authentication, and confidentiality.

•
Secure Communications – The next-generation messaging solution supporting warfighters throughout the world. Telos Secure Information eXchange (T-6) and the AMHS platform offer secure, automated, Web-based capabilities for distributing and managing enterprise messages formatted for the Defense Messaging System as well as collaborating in real-time through video, text, whiteboarding, and document sharing.

•
Telos ID – End-to-end logical and physical security from the gate to the network. Our identity management solutions provide control of physical access to bases, offices, workstations, and other facilities, as well as control of logical access to databases, host systems, and other IT resources.

Critical Accounting Policies and 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, goodwill and intangible assets, income taxes, contingencies and litigation, and assumptions used in evaluating 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") Accounting Standards Codification ("ASC") 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 on 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 –   In the first quarter of 2012, our Secure Networks and Information Assurance solutions areas were merged to create our Cyber Operations and Defense business line.

Regarding our deliverables of secure network solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. Also, within our Cyber Operations and Defense solutions area is our Emerging Technologies Group creating innovative, custom-tailored solutions for government and commercial enterprises.  The solutions within the Cyber Operations and Defense and Emerging Technologies groups 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.

Regarding our information assurance deliverables, 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.

Secure Communications – We provide Secure Information eXchange (T-6) suite of products which include the flagship product the Automated Message Handling System ("AMHS"), Secure Collaboration, Secure Discovery, Secure Directory and Cross Domain Communication, 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.

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.

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 intangible assets
We evaluate the impairment of goodwill and 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"), Secure Communications, and Telos ID, 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 analysis 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, 2014. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized. 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.

Intangible assets consist primarily of customer relationship enhancements. 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. 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, 2013, no impairment charges were 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.

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 2014, 2013, and 2012, the Company's revenue derived from firm fixed-price was 74.9%, 84.1%, and 82.7%, respectively, cost plus contracts was 15.4%, 8.0%, and 9.7%, respectively, and time-and-material contracts was 9.7%, 7.9%, and 7.6%, respectively.

We provide different solutions and are party to contracts of varying revenue types under the NETCENTS (Network-Centric Solutions) contract to the U.S. Air Force.  NETCENTS is an indefinite delivery/indefinite quantity ("IDIQ") and government-wide acquisition contract ("GWAC"), therefore any government customer may utilize the NETCENTS vehicle to meet its purchasing needs. Consequently, revenue earned on the underlying NETCENTS 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 contract itself does not fund any orders and it states that the contract is 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 extend past September 30, 2013, including exercisable option years under existing task orders, are 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 has been filed over the Telos contract award, protests filed by other bidders have resulted in a recommendation by the Government Accountability Office 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 are not prime contract awardees.  This has contributed to the declines in revenues and margins as discussed further below.  While we derive a substantial amount of revenue from task/delivery orders under the NETCENTS contract, 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.

Faced with significant budget pressures, in recent years, the U.S. Government has implemented reductions in government spending, including reductions in appropriations for the U.S. Department of Defense (DoD) and other federal agencies, pursuant to the Budget Control Act of 2011 (BCA), as amended by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013. Pursuant to the terms of the BCA, a sequestration went into effect in March 2013 resulting in a 7.8% reduction to the DoD budget for fiscal year (FY) 2013 to $495.5 billion, excluding funding for military personnel. The DoD budget was approximately $496 billion in FY 2014 and remains at a similar level in FY 2015. Under the BCA, funding for the DoD base budget is expected to increase very modestly to approximately $500 billion for FY 2016. In the years beyond FY 2016, the BCA permits annual increases for DoD base budget funding of about 2.4% with such caps remaining in force through FY 2023. The Executive Office of the President has publicly signaled its intent to submit DoD budget requests that are significantly higher than the BCA caps, as it did in submitting the FY 2016 budget request and the associated FY 2016 FYDP on February 2, 2015 with all years exceeding the caps under the BCA. Such levels of DoD budget funding would require the Congress to enact legislation to raise the BCA caps. In the event DoD appropriations exceed the BCA caps in any fiscal year through FY 2023, across-the-board sequestration would go into effect, as occurred in 2013. Consequently, the DoD ' s overall future spending levels remain uncertain and we are unable to specifically predict potential changes to future DoD budgets on our programs and the effect that the foregoing would have on our future financial performance.

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


   
Years Ended December 31,
 
   
2014
   
2013
   
2012
 
   
(dollar amounts in thousands)
 
                         
Revenue
 
$
127,562
     
100.0
%
 
$
207,394
     
100.0
%
 
$
226,096
     
100.0
%
Cost of sales
   
102,609
     
80.4
     
168,794
     
81.4
     
171,290
     
75.8
 
Selling, general and administrative expenses
   
36,597
     
28.7
     
32,489
     
15.7
     
37,106
     
16.4
 
 
Operating (loss) income
   
(11,644
)
   
(9.1
)
   
6,111
     
2.9
     
17,700
     
7.8
 
Other income (expenses):
                                               
Gain on early extinguishment of debt
   
----
     
----
     
----
     
----
     
5,187
     
2.3
 
Non-operating income
   
414
     
0.3
     
239
     
0.1
     
470
     
0.2
 
Interest expense
   
(5,370
)
   
(4.2
)
   
(5,483
)
   
(2.6
)
   
(6,632
)
   
(2.9
)
 
(Loss) income before income taxes
   
(16,600
)
   
(13.0
)
   
867
     
0.4
     
16,725
     
7.4
 
Benefit (provision) for income taxes
   
5,988
     
4.7
     
(1,678
)
   
(0.8
)
   
(7,230
)
   
(3.2
)
Net (loss) income
   
(10,612
)
   
(8.3
)
   
(811
)
   
(0.4
)
   
9,495
     
4.2
 
 
Less:  Net income attributable to non-controlling interest
   
(1,676
)
   
(1.3
)
   
(1,807
)
   
(0.9
)
   
(2,060
)
   
(0.9
)
 
Net (loss) income attributable to Telos Corporation
 
$
(12,288
)
   
(9.6
)%
 
$
(2,618
)
   
(1.3
)%
 
$
7,435
     
3.3
%

Results of Operations

Years ended December 31, 2014, 2013, and 2012
Revenue .  Revenue decreased by 38.5% to $127.6 million for 2014 from $207.4 million for 2013. Such decrease primarily consists of a decrease in sales from the U.S. Air Force NETCENTS contract. 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, but to date there have been no delivery orders issued under the new contract, due to the government's evaluation of award protests. No protest has been filed over the Telos contract award. Services revenue decreased by 28.2% to $103.1 million for 2014 from $143.5 million for 2013, primarily attributable to decreases in sales of $37.9 million of Cyber Operations and Defense in secure networks solutions deliverables under several NETCENTS delivery orders for Telos-installed solutions, $2.8 million of Secure Communications solutions, and $0.8 million of Telos ID solutions, offset by an increase in sales of $1.1 million of Cyber Operations and Defense in information assurance deliverables.  The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables.  Product revenue for 2014 decreased by 61.7% to $24.5 million from $63.9 million for 2013, primarily attributable to a decrease in sales of $44.6 million of Cyber Operations and Defense in resold products, offset by increases in sales of $3.3 million of Telos ID solutions and $1.9 million of proprietary software sales in Cyber Operations and Defense information assurance deliverables.

Revenue decreased by 8.3% to $207.4 million for 2013 from $226.1 million for 2012.  Such decrease is primarily attributable to decreased sales from the U.S. Air Force NETCENTS contract.  As discussed above, NETCENTS is an IDIQ contract utilized by multiple government customers and sales under NETCENTS varied from period to period according to the solution mix and timing of deliverables for a particular period. Services revenue decreased by 19.1% to $143.5 million for 2013 from $177.3 million for 2012, primarily attributable to decreases in sales of $20.2 million of Cyber Operations and Defense in secure networks solutions deliverables under several NETCENTS delivery orders for Telos-installed solutions, $10.6 million of Cyber Operations and Defense in information assurance deliverables, and $5.1 million of Secure Communications solutions, offset by an increase in sales of $2.1 million of Telos ID 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 for 2013 increased by 30.9% to $63.9 million from $48.8 million for 2012, primarily attributable to an increase in sales of $26.2 million of Cyber Operations and Defense in resold products, offset by decreases in sales of $8.2 million of Telos ID solutions, $2.8 million of proprietary software sales in Cyber Operations and Defense information assurance deliverables, and $0.1 million of Secure Communications solutions.  The increase in resold product revenue was the result of decisions taken by management to increase all revenue sources in response to the impact of the budget sequestration discussed above. The increase in product revenue is not consistent with the Company's longer term strategy of focusing on solutions and services and as such is expected to be temporary while mitigating the effects of the budget sequestration.

Cost of sales.  Cost of sales decreased by 39.2% to $102.6 million for 2014 from $168.8 million for 2013 as a result of decreases in revenue.  Cost of sales for services decreased by $27.2 million, and as a percentage of services revenue increased by 3.6%, due to a change in the mix and nature of the programs including an increase in certain Telos-installed solutions in Cyber Operations and Defense in secure networks solutions deliverables under NETCENTS, and recognition of an estimated loss on a contract in 2014 .  Cost of sales for product decreased by $39.0 million, and as a percentage of product revenue decreased by 10.3%, primarily due to decreases in product revenue for resold product, offset by an increase in proprietary software revenue.  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.

Cost of sales decreased by 1.5% to $168.8 million for 2013 from $171.3 million for 2012 as a result of decreases in revenue.  Cost of sales for services decreased by $22.2 million, and as a percentage of services revenue increased by 2.0%, due to a change in the mix and nature of the programs including an increase in certain Telos-installed solutions in Cyber Operations and Defense in secure networks solutions deliverables under NETCENTS.  Cost of sales for product increased by $19.7 million, and as a percentage of product revenue increased by 11.9%, primarily due to increases in product revenue for resold product and decreases in proprietary software revenue.  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 decreased by 35.4% to $25.0 million for 2014 from $38.6 million for 2013.  Gross margin increased 1.0% to 19.6% for 2014 from 18.6% for 2013, due to various changes in the mix of contracts in all business lines, primarily increases in proprietary software sales and information assurance deliverables in the Cyber Operations and Defense business line.

Gross profit decreased by 29.6% to $38.6 million for 2013 from $54.8 million for 2012.  Gross margin decreased 5.6% to 18.6% for 2013 from 24.2% for 2012, due to various changes in the mix of contracts in all business lines, primarily increases in resold products and decreases in solutions deliveries in the Cyber Operations and Defense business line and decreases in proprietary software sales.

Selling, general, and administrative expenses .  Selling, general, and administrative expenses increased 12.6% to $36.6 million for 2014 from $32.5 million for 2013.  Such increase is primarily attributable to increases in bonuses of $1.1 million, labor costs of $2.5 million, outside services of $0.9 million, trade shows of $0.1 milion, and travel costs of $0.1 million, offset by a decrease in legal costs of $1.0 million.

Selling, general, and administrative expenses decreased 12.4% to $32.5 million for 2013 from $37.1 million for 2012.  Such decrease is primarily attributable to decreases in bonuses of $2.0 million, labor costs of $1.7 million, legal fees of $0.6 million, and travel costs of $0.2 million.

Interest expense.   Interest expenses decreased 2.1% to $5.4 million for 2014 from $5.5 million for 2013, primarily due to a decrease in interest on the Facility, offset by an increase in interest on the Ashburn lease.

Interest expenses decreased 17.3% to $5.5 million for 2013 from $6.6 million for 2012, primarily due to a decrease in interest expense due to the early extinguishment of the ITL Note (as defined below) in 2012, and a reduction of interest expense due to the partial redemption of the senior redeemable preferred stock. Components of interest expense are as follows:

   
December 31,
 
   
2014
   
2013
   
2012
 
   
(amounts in thousands)
 
Commercial and subordinated note interest incurred
 
$
1,481
   
$
1,557
   
$
1,786
 
Preferred stock interest accrued
   
3,889
     
3,926
     
4,051
 
ITL Note accretion
   
----
     
----
     
795
 
 
Total
 
$
5,370
   
$
5,483
   
$
6,632
 

Provision for income taxes .  Income tax benefit was $6.0 million for 2014, compared to income tax provision of $1.7 million for 2013, primarily due to pretax loss of $16.6 million for 2014, compared to pretax income of $0.8 million for 2013.  Provision for income taxes decreased to $1.7 million for 2013 from $7.2 million for 2012, primarily due to a decrease in pretax income.

Liquidity and Capital Resources

As described in more detail below, we maintain a revolving credit facility (the "Facility") with Wells Fargo Capital Finance, Inc. ("Wells Fargo") which was formerly Wells Fargo Foothill, Inc. Borrowings under the Facility are collateralized by substantially all of our assets including inventory, equipment, and accounts receivable. The amount of available borrowings fluctuates 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 provides us with virtually all of the liquidity we require to meet our operating, investing and financing needs. Therefore maintaining sufficient availability on the Facility is the most critical factor in our liquidity. 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 the Facility. 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 availability on the Facility 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 availability 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 on the Facility unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on the Facility, and therefore our liquidity.

Additionally, management evaluated the results of operations for 2014 and the continued impact of the NETCENTS-2 contract delay as well as other government budgetary funding issues (as discussed in 'Results of Operations' above) and 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 $5 million in subordinated notes to affiliated entities of John R.C. Porter  ("Porter Notes"), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. Should management determine that additional capital is required, management would likely look to these sources of funding first 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.  With the additional proceeds of the December 2014 Telos ID sale and the Porter Notes, management believes that the Company's existing borrowing capacity is sufficient to fund our capital and liquidity needs for the foreseeable future.

Our working capital was $4.2 million and $17.3 million as of December 31, 2014 and 2013, respectively.

Cash provided by operating activities was $6.2 million for the year ended December 31, 2014, compared to cash provided by operating activities of $4.8 million for the year ended December 31, 2013, and cash provided by operating activities of $16.1 million for 2012. 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 2014, net loss was $10.6 million, which included $2.3 million of amortization of intangible assets resulting from the ITL acquisition. In 2013, net loss was $0.8 million, which included $2.3 million of amortization of intangible assets resulting from the ITL acquisition. In 2012, net income was $9.5 million, which included $5.2 million gain from early extinguishment of the ITL note, 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, 2014, 2013, and 2012 was $0.7 million, $0.5 million, and $0.6 million, respectively, which consisted of the purchases of property and equipment.
Cash used in financing activities for year ended December 31, 2014 was $5.6 million, compared to $4.4 million for 2013, and $15.5 million for 2012.  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. The financing activities in 2013 consisted primarily of net proceeds of $1.0 million from the Facility, redemption of $2.0 million of senior preferred stock, repayments of $1.2 million under capital leases, repayments of a $0.4 million of a term loan, and distributions of $1.8 million to the Class B Member of Telos ID.  The financing activities in 2012 consisted primarily of net proceeds of $2.7 million from the Facility, payment of $10.9 million of ITL notes, redemption of $4.0 million of senior preferred stock, repayments of $0.9 million under capital leases, repayments of a $0.4 million of a term loan, and distributions of $2.0 million to the Class B Member of Telos ID.

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:

Senior Revolving Credit Facility

On July 31, 2013, we amended our $30 million revolving credit facility (the " Facility " ) with Wells Fargo Capital Finance, LLC ( " Wells Fargo " ) to extend the maturity date to November 13, 2014 from May 17, 2014.  On March 27, 2014, we amended the Facility to extend the maturity date to November 13, 2015.  In addition, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA (as defined in the Facility) covenants.  The March 2014 amendment also amends the terms of the Facility with respect to repayment on the term loan component.  Since 2010, the principal of the term loan component has been repaid in quarterly installments of $93,750.  The amended Facility requires quarterly installment payments of $250,000 beginning July 1, 2014, with a final installment of the unpaid principal amount payable on November 13, 2015, the maturity date of the amended Facility.  In consideration for the closing of this amendment, we paid Wells Fargo a fee of $75,000, plus expenses related to the closing.

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

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

On March 31, 2015 the Facility was amended ("the Twelfth Amendment") to extend the maturity date to April 1, 2016.  The Twelfth Amendment also amends the terms of the Facility, reducing the total credit available from $30 million to $20 million, and reducing the letter of credit sub-line limit from $5 million to $1 million. The reduced limits under the lending agreement more appropriately reflect the Company's current and near-term projected utilization of the Facility. The Twelfth Amendment also amends the terms of the Facility with respect to the repayment of the term loan component. Since March 2014, the principal of the term loan component has been repaid in quarterly installments of $250,000.  The amended Facility requires quarterly installment payments of $350,000 beginning April 1, 2015, with a final installment of unpaid principal amount payable on April 1, 2016, the maturity date of the amended Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. The Twelfth Amendment also establishes a minimum excess availability requirement under the revolving component of $1.25 million and allows for the payment of interest under the Porter Note, subject to a separate subordination agreement.  In consideration for the closing of this amendment, we paid Wells Fargo a fee of $150,000, plus expenses related to the closing.

Prior to the Twelfth Amendment, the interest rate on the term loan component was the same as that on the revolving credit component of the Facility, which was the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company could have elected to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%.  As of December 31, 2014, we had not elected the LIBOR Rate option. The Twelfth Amendment also amended the interest rate on the components of the Facility.  The Twelfth Amendment established two tiers of interest rate pricing based upon the Company's performance compared to projections provided to Wells Fargo for 2015.  The first tier interest rate pricing is effective as of the date of the amendment and is the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 5%. Upon receipt by Wells Fargo of our second quarter 2015 financials, pricing will be redetermined based on the Company's performance compared to plan. Failure to meet or exceed plan EBITDA (as defined by the Facility) would result in the first tier rates remaining in effect until the quarter-end reflecting plan achievement. Assuming plan achievement, the second tier interest rate pricing would be effective, which is the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%.  Borrowings under the Facility are collateralized by substantially all of the Company's assets including inventory, equipment, and accounts receivable.

As of December 31, 2014, the interest rate on the Facility was 4.25%.   We incurred interest expense in the amount of $0.7 million, $0.6 million, and $0.8 million for the years ended December 31, 2014, 2013, and 2012, respectively, on the Facility.

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million.  On May 16, 2012 and on August 24, 2012, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

On December 18, 2012, we prepaid and satisfied in full our obligations under a subordinated promissory note with IT Logistics, Inc. ("ITL") with a principal amount of $15 million (the "ITL Note").  As a condition to the prepayment of the ITL Note, ITL accepted payment in the amount of $7.6 million, which is the sum of $7.5 million in principal plus $0.1 million in accrued interest. This amount represents a discount of 50% off of the principal amount of the ITL Note. No penalties were due to ITL in connection with the prepayment of the Note.  As a result of this transaction, a gain in the amount of $5.2 million was recorded in other income on the consolidated statements of operations.   On or about December 17, 2012, ITL and Telos signed an agreement in which ITL agreed to accept the prepayment and discount in full satisfaction of the ITL Note.  Wells Fargo consented to the payment of approximately $7.6 million on December 17, 2012. 

On June 11, 2013, the Facility was further amended to allow for the further redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $2.0 million.  On June 14, 2013, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

The Facility has various covenants that may, among other things, affect our ability to merge with another entity, sell or transfer certain assets, pay dividends and make other distributions beyond certain limitations. The financial covenants also include minimum EBITDA, minimum recurring revenue and a limit on capital expenditures. In conjunction with the March 2014 amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA covenants.  In conjunction with the March 2015 amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility. The March 2015 amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. Prior to the March 2014 amendment, the term loan component of the Facility amortized at 5% per year, which is paid in quarterly installments and is classified as current on the consolidated balance sheets.  Since July 1, 2014, the quarterly installment repayments had been $250,000, but the Twelfth Amendment increased the quarterly installment payment to $350,000, effective with the April 1, 2015 installment.  The remaining balance of the term loan, or $5.5 million, and the revolving component of the Facility mature over the period 2015 through April 1, 2016.

At December 31, 2014, we had outstanding borrowings of $10.9 million on the Facility, which included the $5.5 million term loan, of which $2.3 million was short-term. At December 31, 2013, the outstanding borrowings on the Facility were $19.8 million, which included the $6.2 million term loan, of which $0.7 million was short-term. At December 31, 2014 and 2013, we had unused borrowing availability on the Facility of $4.9 million and $9.2 million, respectively.  The effective weighted average interest rates on the outstanding borrowings under the Facility were 5.6% and 5.3% for the years ended December 31, 2014 and 2013, respectively.

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 $122.1 million and $118.2 million at December 31, 2014 and 2013, respectively.  We recorded dividends of $3.9 million each for the years ended December 31, 2014 and 2013, 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. 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 and of the Senior Redeemable Preferred Stock, we have been and continue to be precluded from paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than described below. 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, 2014, instruments held by Toxford Corporation ( "Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on February 28, 2017. 

On or about March 15, 2011, Mr. John Porter acquired a total of 75 shares and 105 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, from other holders of the Senior Redeemable Preferred Stock.  As of December 31, 2014, Mr. Porter held 6.3% of the Senior Redeemable Preferred Stock.  In the aggregate, as of December 31, 2014, Mr. Porter and Toxford held a total of 163 shares and 228 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, or 82.7% of the Senior Redeemable Preferred Stock.  Mr. Porter is the sole stockholder of Toxford.  Mr. Porter and Toxford own 39.3% of our Class A Common Stock.

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million.  On May 16, 2012, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 26.7% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the consolidated statements of operations.  Subsequent to such redemption, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 677 shares and 947 shares for Series A-1 and Series A-2, respectively.

On August 24, 2012, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 36.0% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the consolidated statements of operations.  Subsequent to such redemption, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 433 shares and 607 shares for Series A-1 and Series A-2, respectively.

On June 11, 2013, the Facility was further amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $2.0 million.  On June 14, 2013, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 54.5% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the condensed consolidated statements of operations.  Subsequent to such redemption, 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.

At December 31, 2014 and 2013, 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, 2014.
      At December 31, 2014 and 2013, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.5 million and $1.4 million, respectively.  We accrued dividends on the Senior Redeemable Preferred Stock of $67,000, $103,000, and $228,000 for the years ended December 31, 2014, 2013, and 2012, 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, 2014 and 2013, 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 entered into with Wells Fargo to which the Public Preferred Stock is subject, other senior obligations, and Maryland law limitations in existence prior to October 1, 2009.  Pursuant to their terms, 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, limitations set forth in the covenants in the Facility, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock. 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, 2014 and 2013.
   We are parties with certain of our subsidiaries to the Facility agreement with Wells Fargo, whose term expires on April 1, 2016.  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.

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 Facility prohibits, 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, 2014.  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 $88.2 million and $84.4 million as of December 31, 2014 and 2013, respectively.   We accrued dividends on the Public Preferred Stock of $3.8 million for the years ended December 31, 2014, 2013, and 2012, 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.

The carrying value of the accrued Paid-in-Kind ("PIK") dividends on the Public Preferred Stock for the period 1992 through June 1995 was $4.0 million.  Had we accrued such dividends on a cash basis for this time period, the total amount accrued would have been $15.1 million.  However, as a result of the redemption of the 410,000 shares of the Public Preferred Stock in November 1998, such amounts were reduced and adjusted to $3.5 million and $13.4 million, respectively.  Our Articles of Amendment and Restatement, Section 2(a) states, "Any dividends payable with respect to the Exchangeable Preferred Stock ("Public Preferred Stock") during the first six years after the Effective Date (November 20, 1989) may be paid (subject to restrictions under applicable state law), in the sole discretion of the Board of Directors, in cash or by issuing additional fully paid and nonassessable shares of Exchangeable Preferred Stock …".  Accordingly, the Board had the discretion to pay the dividends for the referenced period in cash or by the issuance of additional shares of Public Preferred Stock.  During the period in which we stated our intent to pay PIK dividends, we stated our intention to amend our Charter to permit such payment by the issuance of additional shares of Public Preferred Stock.  In consequence, as required by applicable accounting requirements, the accrual for these dividends was recorded at the estimated fair value (as the average of the ask and bid prices) on the dividend date of the shares of Public Preferred Stock that would have been (but were not) issued.  This accrual was $9.9 million lower than the accrual would be if the intent was only to pay the dividend in cash, at that date or any later date.

In May 2006, the Board concluded that the accrual of PIK dividends for the period 1992 through June 1995 was no longer appropriate.  Since 1995, we have disclosed in the footnotes to our audited financial statements the carrying value of the accrued PIK dividends on the Public Preferred Stock for the period 1992 through June 1995 as $4.0 million, and that had we accrued cash dividends during this time period, the total amount accrued would have been $15.1 million. As stated above, such amounts were reduced and adjusted to $3.5 million and $13.4 million, respectively, due to the redemption of 410,000 shares of the Public Preferred Stock in November 1998.  On May 12, 2006, the Board voted to confirm that our intent with respect to the payment of dividends on the Public Preferred Stock for this period changed from its previously stated intent to pay PIK dividends to that of an intent to pay cash dividends.  We therefore changed the accrual from $3.5 million to $13.4 million, the result of which was to increase our negative shareholder equity by the $9.9 million difference between those two amounts, by recording an additional $9.9 million charge to interest expense for the second quarter of 2006, resulting in a balance of $120.1 million and $116.3 million for the principal amount and all accrued dividends on the Public Preferred Stock as of December 31, 2014 and 2013, respectively. This action is considered a change in assumption that results in a change in accounting estimate as defined in ASC 250-10, which sets forth guidance concerning accounting changes and error corrections.

Contractual Obligations

The following summarizes our contractual obligations and our redeemable preferred stock at December 31, 2014 (in thousands):

       
Payments due by Period
 
   
Total
   
2015
     
2016 - 2018
     
2019 - 2021
   
2022 and later
 
                             
Capital lease obligations (1)
 
$
30,942
   
$
1,838
   
$
5,701
   
$
6,137
   
$
17,266
 
Senior revolving credit facility (2)
   
10,890
     
2,300
     
8,590
     
----
     
----
 
Operating lease obligations
   
3,147
     
622
     
994
     
876
     
655
 
   
$
44,979
   
$
4,760
   
$
15,285
   
$
7,013
   
$
17,921
 
                                         
Senior preferred stock (3)
 
$
1,958
                                 
Public preferred stock (4)
   
120,097
                                 
   
$
122,055
                                 
Total
 
$
167,034
                                 
    (1)  Includes interest expense:
 
$
9,436
   
$
1,066
   
$
2,943
   
$
2,461
   
$
2,966
 
(2)   Amount does not include interest on the Facility as we are unable to predict the amounts of interest due to the short-term nature of the advances and repayments.   Interest expense for 2014 was $0.7 million.
(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, 2014, and includes accrual of accumulated dividends of $1.5 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, 2014, and includes accrual of accumulated dividends and accretion of $113.7 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 $0.7 million, $0.6 million, and $0.6 million for 2014, 2013, and 2012, respectively.  We presently anticipate capital expenditures of approximately $1.8 million in 2015; however, there can be no assurance that this level of capital expenditures will occur.  We believe that available cash and borrowings under the amended Facility will be sufficient to generate adequate amounts of cash to fund our projected capital expenditures for 2015.

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
We are exposed to interest rate volatility with regard to our variable rate debt obligations under the Facility.  As of December 31, 2014, interest on the Facility is charged at 4.25%.  The effective average interest rates on the outstanding borrowings under the Facility in 2014 and 2013 were 5.6% and 5.3%, respectively.  The Facility had an outstanding balance of $10.9 million at December 31, 2014.

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, 2014, 2013 and 2012
28
   
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2014, 2013 and 2012
29
   
Consolidated Balance Sheets as of December 31, 2014 and 2013
30 - 31
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013, and 2012
32 - 33
   
Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2014, 2013, and 2012
34
   
Notes to Consolidated Financial Statements
35 – 58
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, 2014 and 2013 and the related consolidated statements of operations and comprehensive (loss) income, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2014.  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 standards of the Public Company Accounting Oversight Board (United States).  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, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.


/s/ BDO USA, LLP

Bethesda, Maryland

March 31, 2015

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

   
Years Ended December 31,
 
   
2014
   
2013
   
2012
 
Revenue (Note 5)
           
Services
 
$
103,071
   
$
143,489
   
$
177,266
 
Products
   
24,491
     
63,905
     
48,830
 
     
127,562
     
207,394
     
226,096
 
Costs and expenses
                       
Cost of sales – Services
   
82,481
     
109,676
     
131,906
 
Cost of sales – Products
   
20,128
     
59,118
     
39,384
 
     
102,609
     
168,794
     
171,290
 
Selling, general and administrative expenses
   
36,597
     
32,489
     
37,106
 
                         
Operating (loss) income
   
(11,644
)
   
6,111
     
17,700
 
Other income (expenses)
                       
Gain on early extinguishment of debt (Note 6)
   
--
     
--
     
5,187
 
Non-operating income
   
414
     
239
     
470
 
Interest expense
   
(5,370
)
   
(5,483
)
   
(6,632
)
(Loss) income before income taxes
   
(16,600
)
   
867
     
16,725
 
Benefit (provision) for income taxes (Note 9)
   
5,988
     
(1,678
)
   
(7,230
)
                         
Net (loss)  income
   
(10,612
)
   
(811
)
   
9,495
 
                         
Less: Net income attributable to non-controlling interest (Note 2)
   
(1,676
)
   
(1,807
)
   
(2,060
)
Net (loss) income attributable to Telos Corporation
 
$
(12,288
)
 
$
(2,618
)
 
$
7,435
 

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

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

   
Years Ended December 31,
 
   
2014
   
2013
   
2012
 
Net (loss) income
 
$
(10,612
)
 
$
(811
)
 
$
9,495
 
Other comprehensive (loss) income:
                       
Foreign currency translation adjustments
   
(3
)
   
(24
)
   
(19
)
Actuarial gain on pension liability adjustments, net of tax
   
--
     
--
     
56
 
Total other comprehensive (loss) income, net of tax
   
(3
)
   
(24
)
   
37
 
Comprehensive income attributable to non-controlling interest
   
(1,676
)
   
(1,807
)
   
(2,060
)
Comprehensive (loss) income attributable to Telos Corporation
 
$
(12,291
)
 
$
(2,642
)
 
$
7,472
 

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

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

ASSETS

   
December 31,
 
   
2014
   
2013
 
Current assets (Note 6)
       
Cash and cash equivalents
 
$
32
   
$
94
 
Accounts receivable, net of reserve of $372 and $321, respectively (Note 5)
   
22,522
     
45,632
 
Inventories, net of obsolescence reserve of $1,366 and $417, respectively
   
3,345
     
4,885
 
Deferred income taxes (Note 9)
   
1,004
     
--
 
Deferred program expenses
   
1,391
     
576
 
Other current assets
   
6,144
     
1,271
 
Total current assets
   
34,438
     
52,458
 
Property and equipment (Note 6)
               
Furniture and equipment
   
11,623
     
11,008
 
Leasehold improvements
   
2,431
     
2,756
 
Property and equipment under capital leases
   
30,849
     
25,170
 
     
44,903
     
38,934
 
Accumulated depreciation and amortization
   
(25,990
)
   
(24,316
)
     
18,913
     
14,618
 
Deferred income taxes - long-term (Note 9)
   
910
     
--
 
Goodwill (Note 3)
   
14,916
     
14,916
 
Other intangible assets (Note 3)
   
3,386
     
5,643
 
Other assets (Note 6)
   
1,257
     
974
 
Total assets
 
$
73,820
   
$
88,609
 


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


TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousand s, except share data)

LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' DEFICIT

   
December 31,
 
   
2014
   
2013
 
Current liabilities
       
Accounts payable and other accrued payables (Note 6)
 
$
17,816
   
$
23,290
 
Accrued compensation and benefits
   
4,203
     
5,941
 
Deferred revenue
   
3,344
     
2,768
 
Deferred income taxes (Note 9)
   
--
     
25
 
Senior credit facility – short-term (Note 6)
   
2,300
     
688
 
Capital lease obligations – short-term (Note 10)
   
772
     
657
 
Other current liabilities
   
1,774
     
1,782
 
Total current liabilities
   
30,209
     
35,151
 
Senior revolving credit facility (Note 6)
   
8,590
     
19,141
 
Capital lease obligations (Note 10)
   
20,735
     
14,901
 
Deferred income taxes (Note 9)
   
--
     
169
 
Senior redeemable preferred stock (Note 7)
   
1,958
     
1,891
 
Public preferred stock (Note 7)
   
120,097
     
116,274
 
Other liabilities
   
717
     
490
 
Total liabilities
   
182,306
     
188,017
 
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 and 40,218,461 shares issued and outstanding, respectively
   
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
     
146
 
Accumulated other comprehensive income
   
45
     
48
 
Accumulated deficit
   
(112,422
)
   
(100,134
)
Total Telos stockholders' deficit
   
(109,070
)
   
(99,862
)
Non-controlling interest in subsidiary (Note 2)
   
584
     
454
 
Total stockholders' deficit
   
(108,486
)
   
(99,408
)
Total liabilities, redeemable preferred stock, and stockholders' deficit
 
$
73,820
   
$
88,609
 


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

TELOS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

   
Years Ended December 31,
 
   
2014
   
2013
   
2012
 
Operating activities:
           
Net (loss) income
 
$
(10,612
)
 
$
(811
)
 
$
9,495
 
Adjustments to reconcile net (loss) income to cash provided by operating activities:
                       
Gain on early extinguishment of debt
   
--
     
--
     
(5,187
)
Gain on redemption of senior preferred stock
   
--
     
(222
)
   
(444
)
Stock-based compensation
   
12
     
43
     
--
 
Dividends of preferred stock as interest expense
   
3,890
     
3,926
     
4,050
 
Accretion of notes payable
   
--
     
--
     
655
 
Depreciation and amortization
   
4,251
     
3,817
     
3,812
 
Provision for inventory obsolescence
   
1,359
     
1
     
111
 
Provision (benefit) for doubtful accounts receivable
   
51
     
2
     
(53
)
Amortization of debt issuance costs
   
36
     
71
     
71
 
Deferred income tax (benefit) provision
   
(4,035
)
   
195
     
2,039
 
Loss on disposal of fixed asssets
   
56
     
--
     
--
 
Changes in assets and liabilities:
                       
Decrease (increase) in accounts receivable
   
23,059
     
(11,755
)
   
3,120
 
Decrease in inventories
   
181
     
5,391
     
4,323
 
(Increase) decrease in deferred program expenses
   
(815
)
   
4,705
     
(2,645
)
(Increase) decrease in other current assets and other assets
   
(3,192
)
   
259
     
589
 
(Decrease) increase in accounts payable and other accrued payables
   
(6,490
)
   
390
     
(71
)
(Decrease) increase in accrued compensation and benefits
   
(1,738
)
   
976
     
(3,126
)
Increase (decrease) in deferred revenue
   
576
     
(3,327
)
   
1,708
 
(Decrease) increase in other current liabilities and other liabilities
   
(405
)
   
1,149
     
(2,397
)
Cash provided by operating activities
   
6,184
     
4,810
     
16,050
 
Investing activities:
                       
Purchases of property and equipment
   
(665
)
   
(539
)
   
(591
)
Cash provided by (used in) investing activities
   
(665
)
   
(539
)
   
(591
)
Financing activities:
                       
Proceeds from senior credit facility
   
163,112
     
244,746
     
260,717
 
Repayments of senior credit facility
   
(171,363
)
   
(243,476
)
   
(259,284
)
Repayments of term loan
   
(688
)
   
(375
)
   
(375
)
Increase (decrease) in book overdrafts
   
1,016
     
(238
)
   
1,262
 
Repayments of notes payable
   
--
     
--
     
(10,860
)
Proceeds from assignment of purchase option under lease
   
1,669
     
--
     
--
 
Payments under capital lease obligations
   
(779
)
   
(1,242
)
   
(937
)
Redemptions of senior preferred stock
   
--
     
(2,000
)
   
(4,000
)
Proceeds from sale of Telos ID 10% membership interest
   
3,000
     
--
     
--
 
Distributions to Telos ID Class B membership unit – non-controlling interest
   
(1,548
)
   
(1,821
)
   
(1,973
)
Cash used in financing activities
   
(5,581
)
   
(4,406
)
   
(15,450
)
(Decrease) increase in cash and cash equivalents
   
(62
)
   
(135
)
   
9
 
Cash and cash equivalents, beginning of the year
   
94
     
229
     
220
 
Cash and cash equivalents, end of year
 
$
32
   
$
94
   
$
229
 

   
Years Ended December 31,
 
   
2014
   
2013
   
2012
 
Supplemental disclosures of cash flow information:
           
Cash paid during the year for:
           
Interest
 
$
1,497
   
$
1,533
   
$
1,807
 
Income taxes
 
$
879
   
$
849
   
$
5,903
 
                         
Noncash:Interest on redeemable preferred stock
 
$
3,890
   
$
3,926
   
$
4,050
 
Financing of capital leases
 
$
5,680
   
$
11,712
   
$
99
 
Receivable from sale of Telos ID 10% membership interest
 
$
2,000
   
$
--
   
$
--
 

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

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, 2011
 
$
65
   
$
13
   
$
103
   
$
35
   
$
(104,951
)
 
$
381
   
$
(104,354
)
Net income for the year
   
--
     
--
     
--
     
--
     
7,435
     
2,060
     
9,495
 
Foreign currency translation loss
   
--
     
--
     
--
     
(19
)
   
--
     
--
     
(19
)
Pension liability adjustments
   
--
     
--
     
--
     
56
     
--
     
--
     
56
 
Distributions
   
--
     
--
     
--
     
--
     
--
     
(1,973
)
   
(1,973
)
Balance December 31, 2012
 
$
65
   
$
13
   
$
103
   
$
72
   
$
(97,516
)
 
$
468
   
$
(96,795
)
Net income for the year
   
--
     
--
     
--
     
--
     
(2,618
)
   
1,807
     
(811
)
Foreign currency translation loss
   
--
     
--
     
--
     
(24
)
   
--
     
--
     
(24
)
Stock-based compensation
   
--
     
--
     
43
     
-
     
--
     
--
     
43
 
Distributions
   
--
     
--
     
--
     
--
     
--
     
(1,821
)
   
(1,821
)
Balance December 31, 2013
 
$
65
   
$
13
   
$
146
   
$
48
   
$
(100,134
)
 
$
454
   
$
(99,408
)
Net (loss) income for the year
   
--
     
--
     
--
     
--
     
(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
)



The accompanying notes are an integral part of these consolidated financial statements.
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 and, prior to its dissolution in December 2012, Telos Delaware, Inc.  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.  We currently have the following three business lines:  Cyber Operations and Defense, Secure Communications, and Telos ID. Our Chief Executive Officer is the CODM. Our CODM manages our business primarily by function and reviews financial information on a consolidated basis, accompanied by disaggregated information by line of business as well as certain operational data, for purposes of allocating resources and evaluating financial performance. 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, goodwill and intangible assets, income taxes, contingencies and litigation, and assumptions used in evaluating 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 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 – In the first quarter of 2012, our Secure Networks and Information Assurance solutions areas were merged to create our Cyber Operations and Defense business line.

Regarding our deliverables of secure network solutions, we provide wireless and wired networking solutions consisting of hardware and services to our customers. Also, within our Cyber Operations and Defense solutions area is our Emerging Technologies Group creating innovative, custom-tailored solutions for government and commercial enterprises.  The solutions within the Cyber Operations and Defense and Emerging Technologies groups 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.

Regarding our information assurance deliverables, 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.

Secure Communications – We provide Secure Information eXchange (T-6) suite of products which include the flagship product the Automated Message Handling System ("AMHS"), Secure Collaboration, Secure Discovery, Secure Directory and Cross Domain Communication, 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.

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.

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 $4.7 million and $5.3 million at December 31, 2014 and 2013, respectively.  As of December 31, 2014, 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, 2014
 
$
417
   
$
1,359
   
$
(410
)
 
$
1,366
 
Year Ended December 31, 2013
 
$
416
   
$
1
   
$
--
   
$
417
 
Year Ended December 31, 2012
 
$
315
   
$
111
   
$
(10
)
 
$
416
 

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, 2014, 2013, and 2012, such amounts are negligible. Expenditures for repairs and maintenance are charged to operations as incurred.

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 2014, 2013, and 2012, 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 $2.0 million, $1.6 million, and $1.6 million for the years ended December 31, 2014, 2013, and 2012.

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 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
We evaluate the impairment of goodwill and 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 Operation and Defense, Secure Communications, and Telos ID, 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, 2014. Subsequent reviews may result in future periodic impairments that could have a material adverse effect on the results of operations in the period recognized.

Intangible assets consist primarily of customer relationship enhancements. 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.  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, 2014, 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.  In March 2012, we granted 10,000 shares of restricted stock (Class A common) to an employee.  In March 2013, we granted an additional 4,312,000 shares of restricted stock to our executive officers and employees.  There were no grants issued in 2014.  As of December 31, 2014, 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 the 2013 grants 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 2014, 2013, and 2012, we incurred salary costs for research and development of approximately $2.2 million, $1.7 million, and $1.2 million, respectively, which are recorded as 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 $64,000 and $61,000 as of December 31, 2014 and 2013, respectively; and actuarial gain on pension liability adjustments in Teloworks of $109,000 as of December 31, 2014 and 2013.

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 July 2013, the Financial Accounting Standards Board ( " FASB " ) issued Accounting Standards Update ( " ASU " ) No. 2013-11, " Income Taxes, " which provides that an entity's unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward, with one exception.  That exception states that, to the extent a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  This guidance is effective for public companies for fiscal years and interim periods within such years beginning after December 15, 2013.  The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued 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.  The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017.  Early adoption is not permitted.  The new standard 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 currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial position, results of operations and cash flows.

In August 2014, 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.   We are currently assessing the impact the adoption of ASU 2014-15 will have 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"), by and among the Company and 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 on the Closing Date. 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 (the Company) and Class B (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, will continue 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 the Loan Agreement (as defined below) or if a Default or Event of Default (as each is defined in the Loan Agreement) would occur immediately after giving effect to that purchase and the Agent (as defined below) refuses to consent to that purchase or to waive such violation, Default, or Event of Default.

If either the Class A member or the Class B member elects to sells 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 the Loan Agreement or result in the occurrence of a Default or Event of Default and the Agent does not consent to that purchase or waive the violation, Default, or Event of Default.  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 shares of the sales proceeds and both members would always be entitled to receive the same form of consideration.

In connection with the Transaction, the Company and Wells Fargo Capital Finance, LLC ("Agent"), as agent for certain lenders (the "Lenders") and as a Lender under the Second Amended and Restated Loan and Security Agreement ("Loan Agreement"), entered into the Consent and Ninth Amendment to Second Amended and Restated Loan and Security Agreement (the "Consent") on the Closing Date. Under the Consent, the Agent and the Lenders consented to the consummation of the Transaction and the release of the lien in favor of the Agent on the transferred membership interest; provided that $1 million of the proceeds of the Transaction be applied to the term loan under the Loan Agreement. The parties further agreed to certain amendments to the Loan Agreement.

Prior to the Transaction, the Class A membership unit owns 60% of Telos ID, and as such is allocated 60% of the profits, which was $2.5 million, $2.7 million and $3.1 million for 2014, 2013, and 2012, respectively, and is entitled to appoint three members of the Board of Directors.  The Class B membership unit owns 40% of Telos ID, and as such is allocated 40% of the profits, which was $1.7 million, $1.8 million and $2.1 million for 2014, 2013, and 2012, respectively, and is entitled to appoint two members of the Board of Directors.  The Class B membership unit is 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, 2014, 2013, and 2012, the Class B membership unit received a total of $1.5 million, $1.8 million and $2.0 million, respectively, of such distributions.

The following table details the changes in non-controlling interest for the years ended December 31, 2014, 2013, and 2012 (in thousands):
 
   
2014
   
2013
   
2012
 
 
Non-controlling interest, beginning of period
   $
454
   
$
468
   
$
381
 
Net income
   
1,676
     
1,807
     
2,060
 
Distributions
   
(1,548
)
   
(1,821
)
   
(1,973
)
Purchase of 10% membership interest
   
2
     
--
     
--
 
 
Non-controlling interest, end of period
 
$
584
   
$
454
   
$
468
 

Note 3. Goodwill and Intangible Assets

The goodwill balance was $14.9 million as of December 31, 2014 and 2013.  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, 2014, no impairment charges were taken.

Intangible assets consist primarily of customer relationship enhancements. 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. Amortization expense for 2014, 2013 and 2012 was $2.3 million.  Amortization expense will be $2.3 million annually, through June 30, 2016.  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, 2014, no impairment charges were taken.
 
Intangible assets consist of the following:
   
December 31, 2014
   
December 31, 2013
 
   
Cost
   
Accumulated Amortization
   
 
Cost
   
Accumulated Amortization
 
Intangible assets
 
$
11,286
   
$
7,900
   
$
11,286
   
$
5,643
 
   
$
11,286
   
$
7,900
   
$
11,286
   
$
5,643
 

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, 2014 and 2013, 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.

On May 16, 2012, 26.7% of the Senior Redeemable Preferred Stock (the "Senior Redeemable Preferred Stock") was redeemed for $2.0 million, on August 24, 2012, 36.0% of the Senior Redeemable Preferred Stock was redeemed for $2.0 million, and on June 14, 2013, 54.5% of the Senior Redeemable Preferred Stock was redeemed for $2.0 million (see Note 7 – Redeemable Preferred Stock).  As of December 31, 2014 and 2013, the carrying value of the Senior Redeemable Preferred Stock was $2.0 million and $1.9 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, 2014.

As of December 31, 2014 and 2013, the carrying value of the Company's 12% Cumulative Exchangeable Redeemable Preferred Stock, par value $.01 per share (the "Public Preferred Stock") was $120.1 million and $116.3 million, respectively, and the estimated fair market value was $43.0 million and $48.9 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 96.1%, 98.3%, and 99.1% of consolidated revenue in 2014, 2013, and 2012, 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 94.3% 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.

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

   
December 31,
 
   
2014
   
2013
 
Billed accounts receivable
 
$
15,447
   
$
29,492
 
Unbilled receivables
   
7,447
     
16,461
 
Allowance for doubtful accounts
   
(372
)
   
(321
)
   
$
22,522
   
$
45,632
 


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, 2014
 
$
321
   
$
51
   
$
--
   
$
372
 
Year Ended December 31, 2013
 
$
319
   
$
2
   
$
--
   
$
321
 
Year Ended December 31, 2012
 
$
375
   
$
(53
)
 
$
(3
)
 
$
319
 

(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:

   
2014
   
2013
   
2012
 
           
(dollar amounts in thousands)
         
                         
Federal
 
$
122,549
     
96.1
%
 
$
203,917
     
98.3
%
 
$
224,010
     
99.1
%
Commercial
   
5,013
     
3.9
%
   
3,477
     
1.7
%
   
2,086
     
0.9
%
                                                 
Total
 
$
127,562
     
100.0
%
 
$
207,394
     
100.0
%
 
$
226,096
     
100.0
%

Note 6. Current Liabilities and Debt Obligations

Accounts Payable and Other Accrued Payables
As of December 31, 2014 and 2013, the accounts payable and other accrued payables consisted of $13.6 million and $17.3 million, respectively, in trade account payables and $4.2 million and $6.0 million, respectively, in accrued payables.

Senior Revolving Credit Facility
On July 31, 2013, we amended our $30 million revolving credit facility (the "Facility") with Wells Fargo Capital Finance, LLC ("Wells Fargo") to extend the maturity date to November 13, 2014 from May 17, 2014.  On March 27, 2014, we amended the Facility to extend the maturity date to November 13, 2015. In addition, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA (as defined in the Facility) covenants. The March 2014 amendment also amends the terms of the Facility with respect to repayment on the term loan component. Since 2010, the principal of the term loan component has been repaid in quarterly installments of $93,750. The amended Facility requires quarterly installment payments of $250,000 beginning July 1, 2014, with a final installment of the unpaid principal amount payable on November 13, 2015, the maturity date of the amended Facility. In consideration for the closing of this amendment, we paid Wells Fargo a fee of $75,000, plus expenses related to the closing.

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

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

On March 31, 2015 the Facility was amended ("the Twelfth Amendment") to extend the maturity date to April 1, 2016.  The Twelfth Amendment also amends the terms of the Facility, reducing the total credit available from $30 million to $20 million, and reducing the letter of credit sub-line limit from $5 million to $1 million. The reduced limits under the Facility more appropriately reflect the Company's current and near-term projected utilization of the Facility. The Twelfth Amendment also amends the terms of the Facility with respect to the repayment of the term loan component. Since March 2014, the principal of the term loan component has been repaid in quarterly installments of $250,000.  The amended Facility requires quarterly installment payments of $350,000 beginning April 1, 2015, with a final installment of unpaid principal amount payable on April 1, 2016, the maturity date of the amended Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. Also in March 2015, we issued $5 million in subordinated notes to affiliated entities of John R.C. Porter ("Porter Notes"), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. The Twelfth Amendment also establishes a minimum excess availability requirement under the revolving component of $1.25 million and allows for the payment of interest under the Porter Notes, subject to separate subordination agreements.  In consideration for the closing of this amendment, we paid Wells Fargo a fee of $150,000, plus expenses related to the closing.

Prior to the Twelfth Amendment, the interest rate on the term loan component was the same as that on the revolving credit component of the Facility, which was the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company could have elected to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%. As of December 31, 2014, we had not elected the LIBOR Rate option. The Twelfth Amendment also amended the interest rate on the components of the Facility.  The Twelfth Amendment established two tiers of interest rate pricing based upon the Company's performance compared to projections provided to Wells Fargo for 2015.  The first tier interest rate pricing is effective as of the date of the amendment and is the higher of the Wells Fargo Bank "prime rate" plus 2.25%, the Federal Funds rate plus 2.75%, or the 3-month LIBOR rate plus 3.25%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 5%.  Upon receipt by Wells Fargo of our second quarter 2015 financials, pricing will be redetermined based on the Company's performance compared to plan. Failure to meet or exceed plan EBITDA (as defined by the Facility) would result in the first tier rates remaining in effect until the quarter-end reflecting plan achievement. Assuming plan achievement, the second tier interest rate pricing would be effective, which is the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%.  Borrowings under the Facility are collateralized by substantially all of the Company's assets including inventory, equipment, and accounts receivable.

As of December 31, 2014, the interest rate on the Facility was 4.25%. We incurred interest expense in the amount of $0.7 million, $0.6 million, and $0.8 million for the years ended December 31, 2014, 2013, and 2012, respectively, on the Facility.

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million.  On May 16, 2012 and on August 24, 2012, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

On December 18, 2012, we prepaid and satisfied in full our obligations under a subordinated promissory note with IT Logistics, Inc. ("ITL") with a principal amount of $15 million (the "ITL Note").  As a condition to the prepayment of the Note, ITL accepted payment in the amount of $7.6 million, which is the sum of $7.5 million in principal plus $0.1 million in accrued interest. This amount represents a discount of 50% off of the principal amount of the ITL Note. No penalties were due to ITL in connection with the prepayment of the ITL Note.  As a result of this transaction, a gain in the amount of $5.2 million was recorded in other income on the consolidated statements of operations.   On or about December 17, 2012, ITL and Telos signed an agreement in which ITL agreed to accept the prepayment and discount in full satisfaction of the ITL Note.  Wells Fargo consented to the payment of approximately $7.6 million on December 17, 2012. 

On June 11, 2013, the Facility was further amended to allow for the further redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $2.0 million.  On June 14, 2013, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 – Redeemable Preferred Stock).

The Facility has various covenants that may, among other things, affect our ability to merge with another entity, sell or transfer certain assets, pay dividends and make other distributions beyond certain limitations. The financial covenants also include minimum EBITDA, minimum recurring revenue and a limit on capital expenditures. In conjunction with the March 2014 amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility including failure to maintain required EBITDA covenants. In conjunction with the March 2015 amendment, Wells Fargo issued a waiver of certain existing defaults under the Facility. The March 2015 amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. Prior to the March 2014 amendment, the term loan component of the Facility amortized at 5% per year, which is paid in quarterly installments and is classified as current on the consolidated balance sheets. Since July 1, 2014, the quarterly installment repayments had been $250,000, but the Twelfth Amendment increased the quarterly installment payment to $350,000, effective with the April 1, 2015 installment. The remaining balance of the term loan, or $5.5 million, and the revolving component of the Facility mature over the period 2014 through April 1, 2016.

At December 31, 2014, we had outstanding borrowings of $10.9 million on the Facility, which included the $5.5 million term loan, of which $2.3 million was short-term.   At December 31, 2013, the outstanding borrowings on the Facility were $19.8 million, which included the $6.2 million term loan, of which $0.7 million was short-term.  At December 31, 2014 and 2013, we had unused borrowing availability on the Facility of $4.9 million and $9.2 million, respectively.  The effective weighted average interest rates on the outstanding borrowings under the Facility were 5.3% and 5.6% for the years ended December 31, 2014 and 2013, respectively.

The following are maturities of the Facility presented by year (in thousands):
   
2015
   
2016
   
Total
 
Short-term:
           
Term loan
 
$
2,300
   
$
--
   
$
2,300
1  
Long-term:
                       
Term loan
 
$
--
   
$
3,200
   
$
3,200
1  
Revolving credit
   
--
     
5,390
     
5,390
2  
Subtotal
 
$
--
   
$
8,590
   
$
8,590
 
Total
 
$
2,300
   
$
8,590
   
$
10,890
 

1 $1 million of the principal will be repaid in 2015 upon application of proceeds from the sale of Telos ID membership interests.  The principal will be repaid in quarterly installments of $350,000, with a final installment of the unpaid principal amount payable on April 1, 2016.
2 Balance due represents balance as of December 31, 2014, with fluctuating balances based on working capital requirements of the Company.

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. 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 and of the Senior Redeemable Preferred Stock, we have been and continue to be precluded from paying any accrued and unpaid dividends on the Senior Redeemable Preferred Stock, other than described below. 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, 2014, instruments held by Toxford Corporation ( "Toxford"), the holder of 76.4% of the Senior Redeemable Preferred Stock, will mature on February 28, 2017. 

On or about March 15, 2011, Mr. John Porter acquired a total of 75 shares and 105 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, from other holders of the Senior Redeemable Preferred Stock.  As of December 31, 2014, Mr. Porter held 6.3% of the Senior Redeemable Preferred Stock.  In the aggregate, as of December 31, 2014, Mr. Porter and Toxford held a total of 163 shares and 228 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, or 82.7% of the Senior Redeemable Preferred Stock. Mr. Porter is the sole stockholder of Toxford. Mr. Porter and Toxford own 39.3% of our Class A Common Stock.

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million.  On May 16, 2012, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 26.7% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the consolidated statements of operations. Subsequent to such redemption, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 677 shares and 947 shares for Series A-1 and Series A-2, respectively.

On August 24, 2012, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 36.0% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the consolidated statements of operations. Subsequent to such redemption, the total number of shares of Senior Redeemable Preferred Stock issued and outstanding was 433 shares and 607 shares for Series A-1 and Series A-2, respectively.

On June 11, 2013, the Facility was further amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $2.0 million.  On June 14, 2013, with the consent of the holders of the outstanding shares of Senior Redeemable Preferred Stock, 54.5% of the Senior Redeemable Preferred Stock with a carrying value of $2.2 million was redeemed for $2.0 million, resulting in a gain in the amount of approximately $0.2 million, representing a discount of 10%, which was recorded in other income on the condensed consolidated statements of operations.  Subsequent to such redemption, 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.

At December 31, 2014 and 2013, 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, 2014.

At December 31, 2014 and 2013, cumulative undeclared, unpaid dividends relating to Senior Redeemable Preferred stock totaled $1.5 million and $1.4 million, respectively.  We accrued dividends on the Senior Redeemable Preferred Stock of $67,000, $103,000 and $228,000 for the years ended December 31, 2014, 2013, and 2012, 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.

12% Cumulative Exchangeable Redeemable Preferred Stock
A maximum of 6,000,000 shares of the Public Preferred Stock, par value $.01 per share, has been authorized for issuance. We initially issued 2,858,723 shares of the Public Preferred Stock pursuant to the acquisition of the Company during fiscal year 1990. The Public Preferred Stock was recorded at fair value on the date of original issue, November 21, 1989, and we made periodic accretions under the interest method of the excess of the redemption value over the recorded value. We adjusted our estimate of accrued accretion in the amount of $1.5 million in the second quarter of 2006.  The Public Preferred Stock was fully accreted as of December 2008.  We declared stock dividends totaling 736,863 shares in 1990 and 1991. Since 1991, no other dividends, in stock or cash, have been declared. In November 1998, we retired 410,000 shares of the Public Preferred Stock. The total number of shares issued and outstanding at December 31, 2014 and 2013, 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 entered into with Wells Fargo to which the Public Preferred Stock is subject, other senior obligations, and Maryland law limitations in existence prior to October 1, 2009.  Pursuant to their terms, 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, limitations set forth in the covenants in the Facility, foreseeable capital and operational requirements, and restrictions and prohibitions of our Articles of Amendment and Restatement, we were unable to meet the redemption schedule set forth in the terms of the Public Preferred Stock. 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, 2014 and 2013.

We are parties with certain of our subsidiaries to the Facility agreement with Wells Fargo, whose term expires on April 1, 2016. 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.

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 Facility prohibits, 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, 2014. 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 $88.2 million and $84.4 million as of December 31, 2014 and 2013, respectively. We accrued dividends on the Public Preferred Stock of $3.8 million for the years ended December 31, 2014, 2013, and 2012, 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.

The carrying value of the accrued Paid-in-Kind ("PIK") dividends on the Public Preferred Stock for the period 1992 through June 1995 was $4.0 million.  Had we accrued such dividends on a cash basis for this time period, the total amount accrued would have been $15.1 million.  However, as a result of the redemption of the 410,000 shares of the Public Preferred Stock in November 1998, such amounts were reduced and adjusted to $3.5 million and $13.4 million, respectively.  Our Articles of Amendment and Restatement, Section 2(a) states, "Any dividends payable with respect to the Exchangeable Preferred Stock ("Public Preferred Stock") during the first six years after the Effective Date (November 20, 1989) may be paid (subject to restrictions under applicable state law), in the sole discretion of the Board of Directors, in cash or by issuing additional fully paid and nonassessable shares of Exchangeable Preferred Stock …". Accordingly, the Board had the discretion to pay the dividends for the referenced period in cash or by the issuance of additional shares of Public Preferred Stock. During the period in which we stated our intent to pay PIK dividends, we stated our intention to amend our Charter to permit such payment by the issuance of additional shares of Public Preferred Stock. In consequence, as required by applicable accounting requirements, the accrual for these dividends was recorded at the estimated fair value (as the average of the ask and bid prices) on the dividend date of the shares of Public Preferred Stock that would have been (but were not) issued. This accrual was $9.9 million lower than the accrual would be if the intent was only to pay the dividend in cash, at that date or any later date.

In May 2006, the Board concluded that the accrual of PIK dividends for the period 1992 through June 1995 was no longer appropriate. Since 1995, we have disclosed in the footnotes to our audited financial statements the carrying value of the accrued PIK dividends on the Public Preferred Stock for the period 1992 through June 1995 as $4.0 million, and that had we accrued cash dividends during this time period, the total amount accrued would have been $15.1 million. As stated above, such amounts were reduced and adjusted to $3.5 million and $13.4 million, respectively, due to the redemption of 410,000 shares of the Public Preferred Stock in November 1998.  On May 12, 2006, the Board voted to confirm that our intent with respect to the payment of dividends on the Public Preferred Stock for this period changed from its previously stated intent to pay PIK dividends to that of an intent to pay cash dividends. We therefore changed the accrual from $3.5 million to $13.4 million, the result of which was to increase our negative shareholder equity by the $9.9 million difference between those two amounts, by recording an additional $9.9 million charge to interest expense for the second quarter of 2006, resulting in a balance of $120.1 million and $116.3 million for the principal amount and all accrued dividends on the Public Preferred Stock as of December 31, 2014 and 2013, respectively. This action is considered a change in assumption that results in a change in accounting estimate as defined in ASC 250-10, which sets forth guidance concerning accounting changes and error corrections.

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. In March 2012, we granted 10,000 shares of restricted stock (Class A common) to an employee.  In March 2013, we granted an additional 4,312,000 shares of restricted stock to our executive officers and employees.  There were no grants issued in 2014.  As of December 31, 2014, 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 the 2013 grants 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
We had granted stock options to certain of our employees under five plans.  The Long-Term Incentive Compensation Plan was adopted in 1990 ("1990 Stock Option Plan") and had option grants under it through 2000. In 1993, stock option plan agreements were reached with certain employees ("1993 Stock Option Plan"). In 1996, the Board of Directors approved and the shareholders ratified the 1996 Stock Option Plan ("1996 Stock Option Plan").

In 2000, the Board of Directors approved two stock option plans, one for Telos Delaware, Inc. ("Telos Delaware Stock Incentive Plan") and one for Xacta Corporation ("Xacta Stock Incentive Plan"), both wholly owned subsidiaries of the Company.  All stock options issued under these plans expired as of December 31, 2012.

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.  There were 0 and 20,000 options outstanding at December 31, 2014 and 2013.  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.

Telos Delaware Stock Incentive Plan
During the third quarter of 2000, our Board of Directors approved a new stock option plan for Telos Delaware, Inc., a wholly owned subsidiary of the Company.  Certain of our key executives and employees were eligible to receive stock options under the plan.  Under the plan, we may award up to 3,500,000 shares of common stock as either incentive or non-qualified stock options. An incentive option must have an exercise price of not lower than fair value on the date of grant.  A non-qualified option would not have an exercise price any lower than 85% of the fair value on the date of grant.  All options had a term of ten years and vested no less rapidly than the rate of 20% per year for each of the first five years unless changed by the Compensation Committee of the Board of Directors.  There were no options outstanding at December 31, 2014 and 2013.  A total of 0, 0, and 6,564 options expired during 2014, 2013, and 2012, respectively; and 983,379 options were exchanged for restricted stock in June 2008. Telos Delaware, Inc. was dissolved in December 2012.

Xacta Stock Incentive Plan
In the third quarter of 2000, Xacta Corporation, a wholly owned subsidiary of the Company, initiated a stock option plan under which up to 3,500,000 shares of Xacta common stock may be awarded to key employees and associates.  The options may be awarded as incentive or non-qualified, had a term of ten years, and vested no less rapidly than the rate of 20% per year for each of the first five years unless changed by the Compensation Committee of the Board of Directors.  The exercise price may not be less than the estimated fair value on the date of grant for an incentive option, or less than 85% of the estimated fair value on the date of grant for a non-qualified stock option.  There were no options outstanding at December 31, 2014 and 2013.  A total of 0, 0, and 3,750 options expired during 2014, 2013, and 2012, respectively; and 2,498,564 options were exchanged for restricted stock in June 2008.

A summary of the status of our stock options for the years ended December 31, 2014, 2013, and 2012 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
   
--
     
--
 
 
2013  Stock Option Activity
               
 
Outstanding at beginning of year
   
20
   
$
0.62
 
Granted
   
--
     
--
 
Exercised
   
--
     
--
 
Canceled
   
-
     
-
 
Outstanding at end of year
   
20
   
$
0.62
 
Exercisable at end of year
   
20
   
$
0.62
 
 
2012  Stock Option Activity
               
 
Outstanding at beginning of year
   
30
   
$
1.33
 
Granted
   
--
     
--
 
Exercised
   
--
     
--
 
Canceled
   
(10
)
   
2.72
 
Outstanding at end of year
   
20
   
$
0.62
 
Exercisable at end of year
   
20
   
$
0.62
 
                 

There were no options outstanding and exercisable at December 31, 2014.


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.  Our total contributions to this Plan for 2014, 2013, and 2012 were $624,000, $598,000, and $649,000, respectively.

Additionally, effective September 1, 2007, Telos ID sponsors a defined contribution savings 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. The total 2014, 2013, and 2012 Telos ID contributions to this plan were $83,000, $83,000, and $77,000, 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,
 
   
2014
   
2013
   
2012
 
Current (benefit) provision
           
Federal
 
$
(1,759
)
 
$
1,219
   
$
4,362
 
State
   
(194
)
   
264
     
829
 
Total current
   
(1,953
)
   
1,483
     
5,191
 
                         
Deferred (benefit) provision
                       
Federal
   
(3,820
)
   
133
     
1,881
 
State
   
(215
)
   
62
     
158
 
Total deferred
   
(4,035
)
   
195
     
2,039
 
Total (benefit) provision
 
$
(5,988
)
 
$
1,678
   
$
7,230
 

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,
 
   
2014
   
2013
   
2012
 
Computed expected income tax provision
   
35.0
%
   
35.0
%
   
35.0
%
State income taxes, net of federal income tax benefit
   
2.5
     
(17.3
)
   
3.6
 
Change in valuation allowance for deferred tax assets
   
0.1
     
(0.3
)
   
(1.3
)
Cumulative deferred adjustments
   
(0.3
)
   
(16.9
)
   
--
 
Provision to return adjustments
   
1.1
     
(11.5
)
   
--
 
Other permanent differences
   
(0.5
)
   
(15.4
)
   
(0.1
)
Dividend and accretion on preferred stock
   
(7.5
)
   
(146.0
)
   
10.7
 
FIN 48 liability
   
(0.6
)
   
(5.9
)
   
0.6
 
R&D credit
   
3.0
     
--
     
--
 
Other
   
--
     
--
     
0.8
 
     
32.8
%
   
(178.3
)%
   
49.3
%


The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows (in thousands):

   
December 31,
 
   
2014
   
2013
 
Deferred tax assets:
       
Accounts receivable, principally due to allowance for doubtful accounts
 
$
137
   
$
124
 
Allowance for inventory obsolescence and amortization
   
694
     
356
 
Accrued liabilities not currently deductible
   
2,196
     
2,071
 
Accrued compensation
   
535
     
527
 
Amortization and depreciation
   
3,862
     
2,442
 
Telos ID basis difference
   
--
     
150
 
Net operating loss carryforwards - state
   
180
     
213
 
Total gross deferred tax assets
   
7,604
     
5,883
 
Less valuation allowance
   
(1,868
)
   
(1,901
)
Total deferred tax assets, net of valuation allowance
   
5,736
     
3,982
 
Deferred tax liabilities:
               
Unbilled accounts receivable, deferred for tax purposes
   
(756
)
   
(1,413
)
Goodwill basis adjustment and amortization
   
(3,021
)
   
(2,763
)
Telos ID basis difference
   
(45
)
   
--
 
                 
Total deferred tax liabilities
   
(3,822
)
   
(4,176
)
                 
Net deferred tax assets
 
$
1,914
   
$
(194
)

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

   
Balance Beginning of Period
   
 
 
Additions
   
 
 
Recoveries
   
 
Balance End
of Period
 
                 
December 31, 2014
 
$
1,901
   
$
--
   
$
(33
)
 
$
1,868
 
December 31, 2013
 
$
2,084
   
$
--
   
$
(183
)
 
$
1,901
 
December 31, 2012
 
$
2,281
   
$
--
   
$
(197
)
 
$
2,084
 

At December 31, 2014, for federal income tax purposes there was approximately $4.0 million net operating loss generated, which will be carried back to 2012 for refund of taxes paid.

Under the provisions of ASC 740-10, we determined that there were approximately $708,000 and $607,000 of unrecognized tax benefits required to be recorded in other current liabilities as of December 31, 2014 and 2013, 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, 2011 to 2014, 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):

   
2014
   
2013
   
2012
 
Unrecognized tax benefits, beginning of period
 
$
607
   
$
534
   
$
400
 
Gross increases—tax positions in prior period
   
105
     
55
     
34
 
Gross increases—tax positions in current period
   
47
     
18
     
100
 
Settlements
   
(51
)
   
--
     
--
 
Unrecognized tax benefits, end of period
 
$
708
   
$
607
   
$
534
 

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, 2014 (in thousands):

   
Property
   
Equipment
   
Total
 
2015
 
$
1,808
     $
30
     $
1,838
 
2016
   
1,853
     
1
     
1,854
 
2017
   
1,899
     
1
     
1,900
 
2018
   
1,947
     
--
     
1,947
 
2019
   
1,995
     
--
     
1,995
 
Remainder
   
21,408
     
--
     
21,408
 
                         
Total minimum obligations
   
30,910
     
32
     
30,942
 
Less amounts representing interest (ranging from 5.0 % to 18.8 %)
   
(9,435
)
   
--
     
(9,435
)
                         
Net present value of minimum obligations
   
21,475
     
32
     
21,507
 
Less current portion
   
(742
)
   
(30
)
   
(772
)
                         
Long-term capital lease obligations at December 31, 2014
 
$
20,733
   
$
2
   
$
20,735
 

Future minimum lease payments for all noncancelable operating leases at December 31, 2014 are as follows (in thousands):

2015
 
$
622
 
2016
   
410
 
2017
   
295
 
2018
   
289
 
2019
   
283
 
Remainder
   
1,248
 
 
Total minimum lease payments
 
$
3,147
 

In accordance with the new 2014 Lease, the basic rent increases by a fixed 2.5% escalation annually. Rent expense charged to operations totaled $1.1 million for 2014, 2013, and 2012.

Accumulated amortization for property and equipment under capital leases at December 31, 2014 and 2013 is $13.2 million and $12.1 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, 2014
 
$
113
   
$
140
   
$
(64
)
 
$
189
 
Year Ended December 31, 2013
 
$
226
   
$
70
   
$
(183
)
 
$
113
 
Year Ended December 31, 2012
 
$
953
   
$
(393
)
 
$
(334
)
 
$
226
 

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 2014, 2013, and 2012 were $446,000, $340,000, and $386,000, 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, 2014 and 2013.

On May 16, 2012 and August 24, 2012, the Company redeemed a total of 1,175 shares of Senior Redeemable Preferred Stock, including 405 shares and 567 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, held by Mr. Porter and Toxford, who own 39.3% of our Class A Common Stock.  Subsequent to such redemption, Mr. Porter and Toxford beneficially held 359 shares and 502 shares of Series A-1 and Series A-2, respectively, or 82.7% of the Senior Redeemable Preferred Stock.

On June 14, 2013, the Company redeemed a total of 567 shares of Senior Redeemable Preferred Stock, including 195 shares and 274 shares of Series A-1 and Series A-2 Redeemable Preferred Stock, respectively, held by Mr. Porter and Toxford, who own 39.3% of our Class A Common Stock.  Subsequent to such redemption, Mr. Porter and Toxford beneficially held 163 shares and 228 shares of Series A-1 and Series A-2, respectively, or 82.7% of the Senior Redeemable Preferred Stock.

In May 2013, the Company formally engaged Avison Young, a full-service commercial real estate company, to assist the Company with its various options related to its current facility in Ashburn, Virginia. Mr. Kevin Malloy is a Principal of Avison Young and is the main relationship partner for the Company.  Mr. Malloy is the brother of Mr. Brendan Malloy, a named executive officer of the Company, and the engagement of Avison Young is subject to the Telos Corporation Policy with Respect to Related Person Transactions ("RPT"). Consistent with standard practice in the industry, Avison Young's compensation will consist entirely of a commission payable solely by the landlord to the extent a transaction with the landlord is later consummated. The engagement of Avison Young was approved by the Board of Directors, consistent with the Company's RPT policy.

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
 
2014
               
Revenue
 
$
30,144
   
$
29,009
   
$
38,507
   
$
29,902
 
Gross profit
   
6,442
     
5,396
     
7,504
     
5,611
 
Loss before income taxes and non-controlling interest
   
(4,786
)
   
(5,384
)
   
(3,611
)
   
(2,819
)
Net loss attributable to Telos Corporation (1)
   
(5,559
)
   
(4,346
)
   
(774
)
   
(1,609
)
                                 
2013
                               
Revenue
 
$
47,578
   
$
55,214
   
$
49,279
   
$
55,323
 
Gross profit
   
8,018
     
8,884
     
8,799
     
12,899
 
(Loss) income before income taxes and non-controlling interest
   
(2,067
)
   
(502
)
   
(291
)
   
3,727
 
Net (loss) income attributable to Telos Corporation (1)(2)
   
(1,000
)
   
454
     
3,706
     
(5,778
)

(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)
ASC 740-270 requires the use of an annualized effective tax rate approach in estimating taxes for interim periods.  Changes in projected profits and losses can affect the effective tax rate from one period to another. The Company realized significant pre-tax profits during the fourth quarter which produced a tax provision of $9.1 million for the fourth quarter. Through the nine months ended September 30, 2013, the Company properly recorded a benefit for income taxes in accordance with applying the annualized effective tax rate approach to its nine months' pre-tax loss.

Note 13.  Commitments, Contingencies and Subsequent Events

Financial Condition and Liquidity
As described in Note 7 – Current Liabilities and Debt Obligations, we maintain a revolving Facility with Wells Fargo.  Borrowings under the Facility are collateralized by substantially all of our assets including inventory, equipment, and accounts receivable.  The amount of available borrowings fluctuates 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 provides us with virtually all of the liquidity we require to meet our operating, investing and financing needs. Therefore, maintaining sufficient availability on the Facility is the most critical factor in our liquidity. 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 the Facility. 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 availability on the Facility 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 availability 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 on the Facility unless the slowdown was material in amount and over an extended period of time. Any of these examples would have an impact on the Facility, and therefore our liquidity.

Additionally, management evaluated the results of operations for 2014 and the continued impact of contract delays as well as other government budgetary funding issues, and 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 $5 million in subordinated notes to affiliated entities of John R.C. Porter ( " Porter Notes " ), a holder of Telos Class A Common Stock and Senior Redeemable Preferred Stock. Should management determine that additional capital is required, management would likely look to these sources of funding first 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.  With the additional proceeds of the December 2014 Telos ID sale and the Porter Notes, management believes that the Company's existing borrowing capacity is sufficient to fund our capital and liquidity needs for the foreseeable future.

We anticipate the continued need for a credit facility upon terms and conditions substantially similar to the Facility in order to meet our long term needs for operating expenses, debt service requirements, and projected capital expenditures. Our working capital was $4.2 million and $17.3 million as of December 31, 2014 and 2013, respectively. Although no assurances can be given, we expect that we will be in compliance throughout the term of the Facility with respect to the financial and other covenants.

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.

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 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 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 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.

Following a hearing on April 24, 2014, a hearing was held on the Company's (and certain past and present directors' and officers') Motions to Dismiss Plaintiffs Derivative Claims Pursuant to Maryland Rule 2-502 and the Report of the Special Litigation Committee remain pending before Judge W. Michel Pierson in the Circuit Court.

As of December 31, 2014, Costa Brava and Wynnefield each owns 12.7% of the outstanding Public Preferred Stock.

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 the City of Baltimore, Maryland (the "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 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 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 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 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 Court denied Plaintiffs' motion for reconsideration of the same.

Trial on both the Class D Directors' claims and the Company's counterclaims 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.

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 March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ( " Porter Notes " ) with Mr. John R. C. Porter (and entities which are affiliated with his family, 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 loaned the Company $5 million, with the first tranche of $2.5 million paid on or about March 30 and the second $2.5 million to be received no later than May 15, 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 payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met.  According to the terms of the Porter Notes, the outstanding principal sum would bear interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015.  The Porter Notes do not call for amortization payments and are unsecured.  The unpaid principal, together with interest, is due and payable in full on July 1, 2017.  The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The foregoing summaries of the Porter Notes and the Subordination Agreements are qualified in their entirety and subject to the terms of the Porter Notes  and the Subordination Agreements, which are filed as exhibits to this Annual Report.

On March 31, 2015 the Facility was amended ( " the Twelfth Amendment " ) to extend the maturity date to April 1, 2016.  The Twelfth Amendment also amends the terms of the Facility, reducing the total credit available from $30 million to $20 million, and reducing the letter of credit sub-line limit from $5 million to $1 million. The reduced limits under the Facility more appropriately reflect the Company's current and near-term projected utilization of the Facility. The Twelfth Amendment also amends the terms of the Facility with respect to the repayment of the term loan component. Since March 2014, the principal of the term loan component has been repaid in quarterly installments of $250,000. The amended Facility requires quarterly installment payments of $350,000 beginning April 1, 2015, with a final installment of unpaid principal amount payable on April 1, 2016, the maturity date of the amended Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. The Twelfth Amendment also establishes a minimum excess availability requirement under the revolving component of $1.25 million and allows for the payment of interest under the Porter Notes, subject to the Subordination Agreements. In consideration for the closing of this amendment, we paid Wells Fargo a fee of $150,000, plus expenses related to the closing. The foregoing summary of the Twelfth Amendment is qualified in its entirety and subject to the terms of the Twelfth Amendment, which is filed as an exhibit to this Annual Report.

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, 2014, 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, 2014 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control — Integrated Framework (1992). 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, 2014.

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, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Subsequent Events
On March 31, 2015, the Company entered into Subordinated Loan Agreements and Subordinated Promissory Notes ("Porter Notes") with Mr. John R. C. Porter (and entities which are affiliated with his family, 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 loaned the Company $5 million, with the first tranche of $2.5 million paid on or about March 30 and the second $2.5 million to be received no later than May 15, 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 payments under the Porter Notes are permitted only if certain conditions specified by Wells Fargo are met.  According to the terms of the Porter Notes, the outstanding principal sum would bear interest at the fixed rate of twelve percent (12%) per annum which would be payable in arrears in cash on the 20th day of each May, August, November and February, with the first interest payment date due on August 20, 2015.  The Porter Notes do not call for amortization payments and are unsecured. The unpaid principal, together with interest, is due and payable in full on July 1, 2017. The Porter Notes, in whole or in part, may be repaid at any time without premium or penalty. The foregoing summaries of the Porter Notes and the Subordination Agreements are qualified in their entirety and subject to the terms of the Porter Notes and the Subordination Agreements, which are filed as exhibits to this Annual Report.

On March 31, 2015 the Facility was amended ("the Twelfth Amendment") to extend the maturity date to April 1, 2016.  The Twelfth Amendment also amends the terms of the Facility, reducing the total credit available from $30 million to $20 million, and reducing the letter of credit sub-line limit from $5 million to $1 million. The reduced limits under the Facility more appropriately reflect the Company's current and near-term projected utilization of the Facility. The Twelfth Amendment also amends the terms of the Facility with respect to the repayment of the term loan component. Since March 2014, the principal of the term loan component has been repaid in quarterly installments of $250,000. The amended Facility requires quarterly installment payments of $350,000 beginning April 1, 2015, with a final installment of unpaid principal amount payable on April 1, 2016, the maturity date of the amended Facility. The Twelfth Amendment establishes EBITDA and recurring revenue covenants, amending and restating in the entirety previously established financial covenants. The Twelfth Amendment also establishes a minimum excess availability requirement under the revolving component of $1.25 million and allows for the payment of interest under the Porter Notes, subject to the Subordination Agreements. In consideration for the closing of this amendment, we paid Wells Fargo a fee of $150,000, plus expenses related to the closing. The foregoing summary of the Twelfth Amendment is qualified in its entirety and subject to the terms of the Twelfth Amendment, which is filed as an exhibit to this Annual Report.

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 2015 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.

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)
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
Series A-1 and Series A-2 Redeemable Preferred Stock Extension of Redemption Date – Toxford Corporation, dated May 17, 2010 (Incorporated by reference to Exhibit 10.24 filed with the Company's Form 10-K report for the year ended December 31, 2010)
10.8
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)
10.9
Series A-1 and Series A-2 Redeemable Preferred Stock Consent Letter pursuant to the First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 – Graphite Enterprise Trust LP (Incorporated by reference to Exhibit 10.26 filed with the Company's Form 10-K report for the year ended December 31, 2010)
10.10
Series A-1 and Series A-2 Redeemable Preferred Stock Consent Letter pursuant to the First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 – Graphite Enterprise Trust PLC (Incorporated by reference to Exhibit 10.27 filed with the Company's Form 10-K report for the year ended December 31, 2010)
10.11
Series A-1 and Series A-2 Redeemable Preferred Stock Consent Letter pursuant to the First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 – North Atlantic Smaller Companies Investment Trust PLC (Incorporated by reference to Exhibit 10.28 filed with the Company's Form 10-K report for the year ended December 31, 2010)
10.12
Series A-1 and Series A-2 Redeemable Preferred Stock Consent Letter pursuant to the First Amendment of Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, Inc. dated September 27, 2010 – Toxford Corporation (Incorporated by reference to Exhibit 10.30 filed with the Company's Form 10-K report for the year ended December 31, 2010)
 
10.13
Asset Purchase Agreement, dated as of July 1, 2011, by and among Telos Corporation, IT Logistics, Inc. and Tim Wilbanks  (Incorporated by reference to Exhibit 2 filed with the Company's Form 8-K report on July 8, 2011)
10.14
Subordinated Non-Transferrable Promissory Note, dated July 1, 2011, issued to IT Logistics, Inc. by Telos Corporation in the principal amount of $15 million (Incorporated by reference to Exhibit 4 filed with the Company's Form 8-K report on July 8, 2011)
10.15
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)
10.16*
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)
10.17*
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)
10.18*
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)
10.19*
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)
10.20*
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)
10.21*
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)
10.22*
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)
10.23
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)
10.24
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)
10.25*
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)
10.26
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)
10.27*
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)
10.28
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)
10.29
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)
10.30
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)
10.31
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)
10.32
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)
10.33
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)
10.34+
Tenth Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated February 27, 2015
10.35+
Eleventh Amendment to Second Amended and Restated Loan and Security Agreement between the Company and Wells Fargo Capital Finance, LLC dated March 19, 2015
10.36+
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
 
63
10.37+
Subordinated Loan Agreement between the Company and Porter Foundation Switzerland dated March 31, 2015
10.38+
Subordinated Promissory Note between the Company and Porter Foundation Switzerland dated March 31, 2015
10.39+
Subordinated Loan Agreement between the Company and JP Charitable Foundation Switzerland dated March 31, 2015
10.40+
Subordinated Promissory Note between the Company and JP Charitable Foundation Switzerland dated March 31, 2015
10.41+
Subordination and Intercreditor Agreement by and among the Company, Porter Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015
10.42+
Subordination and Intercreditor Agreement by and among the Company, JP Charitable Foundation Switzerland, and Wells Fargo Capital Finance, LLC dated March 31, 2015
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 "

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 31, 2015
     
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
   
John B. Wood
Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
March 31, 2015
 
 
/s/ Michele Nakazawa
   
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)
March 31, 2015
 
 
/s/ Bernard C. Bailey
   
Bernard C. Bailey
Director
March 31, 2015
 
 
/s/ David Borland
   
David Borland
Director
March 31, 2015
 
 
/s/ William M. Dvoranchik
   
William M. Dvoranchik
Director
March 31, 2015
 
     
Seth W. Hamot
Director
 
/s/ Bruce R. Harris
   
Bruce R. Harris, Lt. Gen., USA (Ret.)
Director
March 31, 2015
 
 
/s/ Charles S. Mahan
   
Charles S. Mahan, Jr. Lt. Gen., USA (Ret)
Director
March 31, 2015
 
 
/s/ John W. Maluda
   
John W. Maluda, Major Gen,, USAF (Ret)
Director
March 31, 2015
 
 
/s/ Robert J. Marino
   
Robert J. Marino
Director
March 31, 2015
 
     
Andrew R. Siegel
Director
 
 
/s/ Jerry O. Tuttle
   
Jerry O. Tuttle, Vice Admiral, USN (Ret.)
Director
March 31, 2015
 


65
Exhibit 21

List of Subsidiaries

Active subsidiaries of the Company as of December 31, 2014:




 
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
 
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:    April 10, 2015
 
 
/s/ John B. Wood
John B. Wood
Chief Executive Officer (Principal Executive Officer)

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:    April 10, 2015
 
/s/ Michele Nakazawa
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)



Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Telos Corporation (the "Company") on Form 10-K for the period ending December 31, 2014 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:    April 10, 2015
 
/s/ John B. Wood
John B. Wood
Chief Executive Officer (Principal Executive Officer)

 

Date:    April 10, 2015
 
/s/ Michele Nakazawa
Michele Nakazawa
Chief Financial Officer (Principal Financial and Accounting Officer)
Exhibit 10.34
TENTH AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS TENTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of February 27, 2015, by and among TELOS CORPORATION , a Maryland corporation ("Telos"), XACTA CORPORATION , a Delaware corporation ("Xacta"; Telos and Xacta are each a "Borrower" and collectively, the "Borrowers"), UBIQUITY.COM, INC. , a Delaware corporation ("Ubiquity"), TELOWORKS, INC. , a Delaware corporation ("Teloworks"; Ubiquity and Teloworks are each, a "Credit Party" and collectively, the "Credit Parties"; the Credit Parties and the Borrowers are each, a "Company" and collectively, the "Companies"), and WELLS FARGO CAPITAL FINANCE, LLC ,   (successor by merger to Wells Fargo Capital Finance, Inc., formerly known as Wells Fargo Foothill, Inc.), as agent ("Agent") for the Lenders (defined below) and as a Lender.
WHEREAS, Borrowers, Credit Parties, Agent and certain other financial institutions from time to time party thereto (the "Lenders") are parties to that certain Second Amended and Restated Loan and Security Agreement dated as of May 17th, 2010 (as amended, restated or otherwise modified from time to time, the "Loan Agreement");
WHEREAS, subject to the terms and conditions contained herein, Agent, Required Lenders and Borrowers have agreed to amend the Loan Agreement in certain respects;
NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:
1.              Defined Terms .  Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement.
 
2.              Amendment to Loan Agreement .  Subject to the satisfaction of the conditions set forth in Section 4 hereof, the Loan Agreement is hereby amended by amending Section 6.3(a)(iii) of the Loan Agreement by replacing each reference to "February 28, 2015" set forth therein with a reference to "March 23, 2015".
 
3.              Ratification .  This Amendment, subject to satisfaction of the conditions set forth in Section 4 hereof, shall constitute an amendment to the Loan Agreement and all of the Loan Documents as appropriate to express the agreements contained herein.  Except as specifically set forth herein, the Loan Agreement and the Loan Documents shall remain unchanged and in full force and effect in accordance with their original terms.
 
4.              Conditions to Effectiveness .  This Amendment shall become effective upon the satisfaction of the following conditions precedent:
(a)              Each party hereto shall have executed and delivered this Amendment to Agent;
(b)              Borrowers shall have delivered to Agent such other documents, agreements and instruments as may be requested or required by Agent in connection with this Amendment, each in form and content acceptable to Agent;
(c)              No Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment after giving effect to the effectiveness of this Amendment; and
(d)              All proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Agent and its legal counsel.
 
5.              Reaffirmation and Confirmation; Acknowledgement .  Each Company hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of such Company, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Loan Document.  Each Company hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations.  The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by each Company in all respects.  Each Company agrees that it shall negotiate in good faith to reset the covenants set forth in Section 7.20 of the Credit Agreement on or prior to March 23, 2015 and each Company acknowledges and agrees that (a) Agent and each Lender have no obligation to amend the covenants set forth in Section 7.20 after the date hereof and (b) a Compliance Certificate with respect to the covenants tested December 31, 2014 shall be delivered pursuant to Section 6.3(a)(iii) (as amended pursuant to this Amendment) on or prior to March 23, 2015 unless Agent and Required Lenders waive or amend such requirement in a Loan Document executed after the date of this Amendment.
 
6.              Miscellaneous .
(a)              Warranties and Absence of Defaults .  To induce Agent and Lenders to enter into this Amendment, each Company hereby represents and warrants to Agent and Lenders that:
(i)
The execution, delivery and performance by it of this Amendment and each of the other agreements, instruments and documents contemplated hereby are within its corporate power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to it, its articles of incorporation and by‑laws, any order, judgment or decree of any court or governmental agency, or any agreement, instrument or document binding upon it or any of its property;
(ii)
each of the Loan Agreement and the other Loan Documents, as amended by this Amendment, are the legal, valid and binding obligation of each Company party thereto enforceable against it in accordance with its terms, except as the enforcement thereof may be subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditor's rights generally, and (B) general principles of equity;
(iii)
the representations and warranties contained in the Loan Agreement and the other Loan Documents are true and accurate as of the date hereof with the same force and effect as if such had been made on and as of the date hereof; and
(iv)
each Company has performed all of its obligations under the Loan Agreement and the Loan Documents to be performed by it on or before the date hereof and as of the date hereof, it is in compliance with all applicable terms and provisions of the Loan Agreement and each of the Loan Documents to be observed and performed by it and no Event of Default or Default (other than the Existing Defaults) has occurred.
(b)              Expenses .  Each Company hereby agrees that Companies, jointly and severally, shall pay on demand all costs and expenses of Agent and each Lender (including the reasonable fees and expenses of outside counsel) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  In addition, each Company hereby agrees that Companies, jointly and severally, shall pay, and save Agent harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  All obligations provided herein shall survive any termination of the Loan Agreement as amended hereby.
(c)              Governing Law .  This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois.
(d)              Counterparts .  This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.  Delivery of an executed counterpart of a signature page of this Amendment by facsimile or by electronic transmission of a portable document file (PDF) or similar file shall be effective as delivery of a manually executed counterpart of this Amendment.
 
7.              Release .
(a)              In consideration of the agreements of Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Company on behalf of itself and such Company's successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the "Releasees" and individually as a "Releasee"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set‑off, demands and liabilities whatsoever (individually, a "Claim" and collectively, "Claims") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which such Company or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with any of the Loan Agreement, or any of the other Loan Documents or transactions thereunder or related thereto.
(b)              Each Company hereby acknowledges and agrees that such Company understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.
(c)              Each Company hereby acknowledges and agrees that such Company agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.
[signature pages follow]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written.
AGENT AND LENDERS:
 
WELLS FARGO CAPITAL FINANCE, LLC.
(successor by merger to Wells Fargo Capital Finance, Inc.) as Agent and as a Lender
 
By
/s/ Matthew Maclay
Name
Matthew Maclay
Title
Director
   
   
BORROWERS:
   
TELOS CORPORATION
A Maryland corporation
   
By
/s/ Michele Nakazawa
Title
CFO
   
   
XACTA CORPORATION
A Delaware corporation
   
By
/s/ Michele Nakazawa
Title
CFO
   
   
CREDIT PARTIES:
   
UBIQUITY.COM, INC.
A Delaware corporation
   
By
/s/ Michele Nakazawa
Title
CFO
   
   
TELOWORKS, INC.
A Delaware corporation
   
By
/s/ David S. Easley
Title
President

Exhibit 10.35
ELEVENTH AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS ELEVENTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of March 19, 2015, by and among TELOS CORPORATION , a Maryland corporation ("Telos"), XACTA CORPORATION , a Delaware corporation ("Xacta"; Telos and Xacta are each a "Borrower" and collectively, the "Borrowers"), UBIQUITY.COM, INC. , a Delaware corporation ("Ubiquity"), TELOWORKS, INC. , a Delaware corporation ("Teloworks"; Ubiquity and Teloworks are each, a "Credit Party" and collectively, the "Credit Parties"; the Credit Parties and the Borrowers are each, a "Company" and collectively, the "Companies"), and WELLS FARGO CAPITAL FINANCE, LLC ,   (successor by merger to Wells Fargo Capital Finance, Inc., formerly known as Wells Fargo Foothill, Inc.), as agent ("Agent") for the Lenders (defined below) and as a Lender.
WHEREAS, Borrowers, Credit Parties, Agent and certain other financial institutions from time to time party thereto (the "Lenders") are parties to that certain Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 (as amended, restated or otherwise modified from time to time, the "Loan Agreement");
WHEREAS, subject to the terms and conditions contained herein, Agent, Required Lenders and Borrowers have agreed to amend the Loan Agreement in certain respects;
NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:
1.              Defined Terms .  Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement.
 
2.              Amendment to Loan Agreement .  Subject to the satisfaction of the conditions set forth in Section 4 hereof, the Loan Agreement is hereby amended by amending Section 6.3(a)(iii) of the Loan Agreement by replacing each reference to "March 23, 2015" set forth therein with a reference to "March 31, 2015".
 
3.              Ratification .  This Amendment, subject to satisfaction of the conditions set forth in Section 4 hereof, shall constitute an amendment to the Loan Agreement and all of the Loan Documents as appropriate to express the agreements contained herein.  Except as specifically set forth herein, the Loan Agreement and the Loan Documents shall remain unchanged and in full force and effect in accordance with their original terms.
 
4.              Conditions to Effectiveness .  This Amendment shall become effective upon the satisfaction of the following conditions precedent:
(a)              Each party hereto shall have executed and delivered this Amendment to Agent;
(b)              Borrowers shall have delivered to Agent such other documents, agreements and instruments as may be requested or required by Agent in connection with this Amendment, each in form and content acceptable to Agent;
(c)              No Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment after giving effect to the effectiveness of this Amendment; and
(d)              All proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Agent and its legal counsel.
 
5.              Reaffirmation and Confirmation; Acknowledgement .  Each Company hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of such Company, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Loan Document.  Each Company hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations.  The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by each Company in all respects.  Each Company agrees that it shall negotiate in good faith to reset the covenants set forth in Section 7.20 of the Credit Agreement on or prior to March 31, 2015 and each Company acknowledges and agrees that (a) Agent and each Lender have no obligation to amend the covenants set forth in Section 7.20 after the date hereof and (b) a Compliance Certificate with respect to the covenants tested December 31, 2014 shall be delivered pursuant to Section 6.3(a)(iii) (as amended pursuant to this Amendment) on or prior to March 31, 2015 unless Agent and Required Lenders waive or amend such requirement in a Loan Document executed after the date of this Amendment.
 
6.              Miscellaneous .
(a)              Warranties and Absence of Defaults .  To induce Agent and Lenders to enter into this Amendment, each Company hereby represents and warrants to Agent and Lenders that:
(i)
The execution, delivery and performance by it of this Amendment and each of the other agreements, instruments and documents contemplated hereby are within its corporate power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to it, its articles of incorporation and by‑laws, any order, judgment or decree of any court or governmental agency, or any agreement, instrument or document binding upon it or any of its property;
(ii)
each of the Loan Agreement and the other Loan Documents, as amended by this Amendment, are the legal, valid and binding obligation of each Company party thereto enforceable against it in accordance with its terms, except as the enforcement thereof may be subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditor's rights generally, and (B) general principles of equity;
(iii)
the representations and warranties contained in the Loan Agreement and the other Loan Documents are true and accurate as of the date hereof with the same force and effect as if such had been made on and as of the date hereof; and
(iv)
each Company has performed all of its obligations under the Loan Agreement and the Loan Documents to be performed by it on or before the date hereof and as of the date hereof, it is in compliance with all applicable terms and provisions of the Loan Agreement and each of the Loan Documents to be observed and performed by it and no Event of Default or Default (other than the Existing Defaults) has occurred.
(b)              Expenses .  Each Company hereby agrees that Companies, jointly and severally, shall pay on demand all costs and expenses of Agent and each Lender (including the reasonable fees and expenses of outside counsel) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  In addition, each Company hereby agrees that Companies, jointly and severally, shall pay, and save Agent harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  All obligations provided herein shall survive any termination of the Loan Agreement as amended hereby.
(c)              Governing Law .  This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois.
(d)              Counterparts .  This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.  Delivery of an executed counterpart of a signature page of this Amendment by facsimile or by electronic transmission of a portable document file (PDF) or similar file shall be effective as delivery of a manually executed counterpart of this Amendment.
 
7.              Release .
(a)              In consideration of the agreements of Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Company on behalf of itself and such Company's successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the "Releasees" and individually as a "Releasee"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set‑off, demands and liabilities whatsoever (individually, a "Claim" and collectively, "Claims") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which such Company or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with any of the Loan Agreement, or any of the other Loan Documents or transactions thereunder or related thereto.
(b)              Each Company hereby acknowledges and agrees that such Company understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.
(c)              Each Company hereby acknowledges and agrees that such Company agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.
[signature pages follow]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written.
AGENT AND LENDERS:
 
WELLS FARGO CAPITAL FINANCE, LLC.
(successor by merger to Wells Fargo Capital Finance, Inc.) as Agent and as a Lender
 
By
/s/ Jordan E. Hilliard
Name
Jordan E. Hilliard
Title
Vice President
   
   
BORROWERS:
   
TELOS CORPORATION
A Maryland corporation
   
By
/s/ Jefferson V. Wright
Title
EVP, General Counsel
   
   
XACTA CORPORATION
A Delaware corporation
   
By
/s/ Jefferson V. Wright
Title
EVP, General Counsel
   
   
CREDIT PARTIES:
   
UBIQUITY.COM, INC.
A Delaware corporation
   
By
/s/ Jefferson V. Wright
Title
EVP, General Counsel
   
   
TELOWORKS, INC.
A Delaware corporation
   
By
/s/ David S. Easley
Title
President

Exhibit 10.36
WAIVER AND TWELFTH AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS WAIVER AND TWELFTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of March 31, 2015, by and among TELOS CORPORATION , a Maryland corporation ("Telos"), XACTA CORPORATION , a Delaware corporation ("Xacta"; Telos and Xacta are each a "Borrower" and collectively, the "Borrowers"), UBIQUITY.COM, INC. , a Delaware corporation ("Ubiquity"), TELOWORKS, INC. , a Delaware corporation ("Teloworks"; Ubiquity and Teloworks are each, a "Credit Party" and collectively, the "Credit Parties"; the Credit Parties and the Borrowers are each, a "Company" and collectively, the "Companies"), and WELLS FARGO CAPITAL FINANCE, LLC ,   (successor by merger to Wells Fargo Capital Finance, Inc., formerly known as Wells Fargo Foothill, Inc.), as agent ("Agent") for the Lenders (defined below) and as a Lender.
WHEREAS, Borrowers, Credit Parties, Agent and certain other financial institutions from time to time party thereto (the "Lenders") are parties to that certain Second Amended and Restated Loan and Security Agreement dated as of May 17th, 2010, (as amended, restated or otherwise modified from time to time, the "Loan Agreement");
WHEREAS, Borrowers and Credit Parties have notified Agent that an Event of Default exists under Section 8.2 of the Loan Agreement due to the creation of certain Liens in favor of Key Government Finance, Inc. on Telos' assets as evidenced by the Key Government Finance Filings (as defined in Section 6(b) below) in violation of Section 7.2 of the Loan Agreement (such Event of Default, the "Existing Default");
WHEEREAS, Borrowers and Credit Parties have requested that Agent and Lenders waive the Existing Default, and Agent and Lenders have agreed to waive the Existing Default subject to the terms and conditions contained herein; and
WHEREAS, subject to the terms and conditions contained herein, Agent, Required Lenders and Borrowers have agreed to amend the Loan Agreement in certain respects, including in order to extend the Maturity Date from November 13, 2015 to April 1, 2016;
NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:
1.              Defined Terms .  Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement.
 
2.              Waiver .  Subject to the satisfaction of the conditions set forth in Section 5 hereof, and in reliance upon the representations and warranties set forth in Section 7(a) hereof, Agent and Lenders hereby waive the Existing Default.  In addition, the parties hereto agree that no Default or Event of Default shall be deemed to have been in existence prior to the date of this Amendment as a result of the existence of the Liens in favor of Key Government Finance, Inc. evidenced by the Key Government Finance Filings (provided that an immediate Event of Default shall exist if the post-closing covenant with respect thereto set forth in Section 6(b) below is not satisfied by the deadline set forth in Section 6(b)).  Agent's and Lenders' waiver of the Existing Default shall not be deemed to be a waiver of any other existing or hereafter arising Defaults or Events of Default or any other deviation from the express terms of the Loan Agreement or any other Loan Document.  This is a limited waiver and shall not be deemed to constitute a consent or waiver of any other term, provision or condition of the Loan Agreement or any other Loan Document, as applicable, or to prejudice any right or remedy that Agent or any Lender may now have or may have in the future under or in connection with the Loan Agreement or any other Loan Document.
 
3.              Amendments to Loan Agreement .  Subject to the satisfaction of the conditions set forth in Section 4 hereof, and in reliance upon the representations and warranties set forth in Section 7(a) hereof, the Loan Agreement is hereby amended as follows:
(a)              Each of the defined terms set forth in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:
" Base Rate Margin " has the meaning set forth in the definition of Applicable Margin.

" LIBOR Rate Margin " has the meaning set forth in the definition of Applicable Margin.

" Maximum Revolver Amount " means $20,000,000.

(b)              Each of the following defined terms is hereby added to Section 1.1 of the Loan Agreement in the appropriate alphabetical order:
" Applicable Margin "  means, as of any date of determination and with respect to Base Rate Loans or LIBOR Rate Loans, as applicable, the applicable margin set forth in the following table that corresponds to the most recent EBITDA calculation for an applicable period set forth below contained in a Compliance Certificate delivered to Agent pursuant to Section 6.3(a)(iii) of the Loan Agreement (the "EBITDA Calculation"); provided, that (x) for the period from the Twelfth Amendment Closing Date through the date Agent receives the EBITDA Calculation with respect to the period ending June 30, 2015, the Applicable Margin shall be set at the margin in the row styled "Tier I", and (y) effective April 1, 2016, the Applicable Margin shall be set at the margin in the row styled "Tier I":

Tier
Applicable Period
EBITDA
Applicable Margin Relative to Base Rate Loans (the " Base Rate Margin ")
Applicable Margin Relative to LIBOR Rate Loans (the " LIBOR Rate Margin ")
I
For the six month period ending on June 30, 2015
< ($3,309,000)
2.25%
5.00%
For the nine month period ending on September 30, 2015
< $427,000
For the twelve month period ending on December 31, 2015
< ($1,455,000)
II
For the six month period ending on June 30, 2015
≥ ($3,309,000)
1.00%
3.75%
For the nine month period ending on September 30, 2015
≥ $427,000
For the twelve month period ending on December 31, 2015
≥ ($1,455,000)

Except as set forth in the preceding paragraph, the Applicable Margin shall be based upon the most recent EBITDA Calculation, which will be calculated as of the end of the fiscal quarters ending June 30, 2015, September 30, 2015, and December 31, 2015.  Except as set forth in the preceding paragraph, the Applicable Margin shall be re-determined quarterly on the first Business Day of the month following the date of delivery to Agent of a Compliance Certificate containing an EBITDA Calculation pursuant to Section 6.3(a)(iii) of the Loan Agreement; provided, that if Companies fail to provide such certification when such certification is due, Agent may elect to set the Applicable Margin at the margin in the row styled "Tier I" as of the date on which the certification was required to be delivered until the date on which such certification is delivered (on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver such certification, the Applicable Margin shall be set at the margin based upon the calculation disclosed by such certification).  If at any time an Event of Default occurs, Agent may elect to set the Applicable Margin at the margin in the row styled "Tier I" as of the date on which such Event of Default occurs (or such later date as Agent may elect).  In the event that, during the term of this Loan Agreement, the information regarding EBITDA contained in any Compliance Certificate delivered pursuant to Section 6.3 of the Loan Agreement is shown to be inaccurate, and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for a period (an "Applicable Period") than the Applicable Margin actually applied for such Applicable Period, then (i) Companies shall immediately deliver to Agent a correct certificate for such Applicable Period, (ii) the Applicable Margin shall be determined as if the correct Applicable Margin (as set forth in the table above) were applicable for such Applicable Period, and (iii) Borrowers shall promptly deliver to Agent full payment in respect of the accrued additional interest as a result of such increased Applicable Margin for such Applicable Period, which payment shall be promptly applied by Agent to the affected Obligations.

" Porter Subordinated Debt " means the Indebtedness evidenced by the Porter Subordinated Debt Documents.
" Porter Subordinated Debt Documents " means collectively, that certain Subordinated Loan Agreement dated as of the Twelfth Amendment Closing Date, by and between Telos and JP Charitable Foundation, that certain Subordinated Loan Agreement dated as of the Twelfth Amendment Closing Date, by and between Telos and Porter Foundation Switzerland, that certain Subordinated Promissory Note dated as of the Twelfth Amendment Closing Date issued by Telos to JP Charitable Foundation, that certain Subordinated Promissory Note dated as of the Twelfth Amendment Closing Date issued by Telos to Porter Foundation Switzerland, and the Porter Subordination Agreements, together with any other agreements, instruments or other documents related thereto or executed in connection therewith.
" Porter Subordination Agreements " means (i) that certain Subordination Agreement dated as of the Twelfth Amendment Closing Date by and among Agent, JP Charitable Foundation and Companies, and (ii) with that certain Subordination Agreement dated as of the Twelfth Amendment Closing Date by and among Agent, Porter Foundation Switzerland and Companies.
" Twelfth Amendment Closing Date " means March 31, 2015.
(c)              The second sentence of Section 2.2 of the Loan Agreement is hereby amended and restated in its entirety as follows:
The principal of the Term Loan shall be repaid in consecutive quarterly installments of $350,000 each on the first day of each calendar quarter (commencing April 1, 2015), with a final installment of the unpaid principal amount of the Term Loan on the Maturity Date.
(d)              Clause (ii) of Section 2.12(a) of the Loan Agreement is hereby amended by replacing the reference therein to "$5,000,000" with a reference to "$1,000,000".
(e)              Section 3.4 of the Loan Agreement is hereby amended by replacing the reference therein to "for a term ending on November 13, 2015 (the " Maturity Date ")" with a reference to "for a term ending April 1, 2016 ("the " Maturity Date ")".
(f)              Section 5 of the Loan Agreement is hereby amended to add a new Section 5.26 as follows:
5.26. Porter Subordinated Debt.

Companies have delivered to Agent true and correct copies of each of the Porter Subordinated Debt Documents.  No party thereto is in default in the performance or compliance with any provisions thereof and the Porter Subordinated Debt Documents comply in all material respects with all applicable laws.  All Indebtedness under the Porter Subordinated Debt Documents is subordinate to the Obligations pursuant to the applicable Porter Subordination Agreement and is subject to the terms and conditions of the applicable Porter Subordination Agreement.  The Porter Subordinated Debt Documents are in full force and effect as of the Twelfth Amendment Closing Date and have not been terminated, rescinded or withdrawn as of such date.  The execution, delivery and performance of the Porter Subordinated Debt Documents do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in full force and effect.  None of the representations or warranties in any Porter Subordinated Debt Document contains any untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading.  The Porter Subordinated Debt is not secured by any assets of Parent or any other Person or guaranteed by any Person.

(g)              Section 6.3(a) of the Loan Agreement is hereby amended by replacing the reference therein to "one of the first 3 fiscal quarters" with a reference to "a fiscal quarter".
(h)              Clause (iii) of Section 6.3(a) of the Loan Agreement is hereby amended by deleting the reference therein to "; provided that (A) subject to clause (B) below, the Compliance Certificate to be delivered pursuant to this Section 6.3(a)(iii) with respect to the month ended December 31, 2014 shall not be required to be delivered until March 31, 2015 and (B) the Compliance Certificate to be delivered with respect to the month ended December 31, 2014 shall not be required to be delivered so long as Administrative Borrower and Required Lenders have agreed to amend Section 7.20 in a manner satisfactory to Required Lenders on or prior to March 31, 2015".
(i)              Section 6.3(a) of the Loan Agreement is hereby amended to add a new clause (iv) at the end thereof as follows:
(iv) a report of TTM Recurring Revenue, by customer contract or product (as applicable) and delineated by month in form and substnace satisfactory to Agent.

(j)              Clause (f) of Section 6.3 of the Loan Agreement is hereby amended by deleting the reference therein to "and" at the end thereof.
(k)              Clause (g) of Section 6.3 of the Loan Agreement is hereby amended and restated and restated in its entirety as follows:
(g) not later than the third (3rd) Business Day of each calendar week, a weekly forecast of Liquidity (as defined in Section 7.20(c)), in form and substance satisfactory to Agent,

(l)              Section 6.3 of the Loan Agreement is hereby amended to add new clauses (h) and (i) at the end thereof as follows:
(h) as soon as available, but in any event within 45 days after the end of each fiscal quarter during each of Parent's fiscal years, software maintenance revenue waterfall report, in form and substance satisfactory to Agent, and
(i) upon the request of Agent, any other report reasonably requested relating to the financial condition of Companies.
(m)              Section 7.1 of the Loan Agreement is hereby amended to add a new clause (e) at the end thereof as follows:
(e) Unsecured Indebtedness in the initial aggregate principal amount of $2,500,000, and in an aggregate principal amount of up to $5,000,000 (if the remainder is funded on or before May 15, 2015), of Telos (and not of any other Company) to JP Charitable Foundation and Porter Foundation Switzerland, severally, so long as such Indebtedness is subject to one of the Porter Subordination Agreements.

(n)              Section 7.8 of the Loan Agreement is hereby amended to add new clauses (e) and (f) at the end thereof as follows:
(e) Make any payment on account of Indebtedness that has been contractually subordinated in right of payment if such payment is not permitted at such time under the subordination terms and conditions (including, without limitation, any payment on account of the Porter Subordinated Debt) if such payment is not expressly permitted at such time under the terms and conditions of the Porter Subordination Agreements.

(f) Directly or indirectly amend, modify, alter, increase or change any of the terms and conditions of any Porter Subordinated Debt Document.

(o)              Sections 7.20(a) and 7.20(b) of the Loan Agreement are hereby amended and restated in their entirety as follows:
(a) Fail to maintain:
(i)
Minimum EBITDA .  EBITDA, measured on a fiscal quarter-end basis, for each period set forth below, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:
Applicable Amount
 
Applicable Period
$ 
(2,125,000
)
For the three month period ending on
March 31, 2015
$ 
(4,059,000
)
For the six month period ending on
June 30, 2015
$ 
(323,000
)
For the nine month period ending on
September 30, 2015
$ 
(2,205,000
)
For the twelve month period ending on December 31, 2015, and the twelve month period ending on the last day of each fiscal quarter thereafter
$
195,000
 
For the twelve month period ending on March 31, 2016, and the twelve month period ending on the last day of each fiscal quarter thereafter
; and

(ii)
Minimum Recurring Revenue .  TTM Recurring Revenue measured on a fiscal quarter-end basis for each fiscal quarter ending from and after the fiscal quarter ending March 31, 2015, of at least $4,500,000.
(b) Make:
(i)
Capital Expenditures .  Capital expenditures in any fiscal year of Parent in excess of $1,500,000.
(p)              Section 7.20(c) of the Loan Agreement is hereby amended and restated in its entirety, effective as of April 3, 2015, as follows:
(c) Fail to maintain:
(i) Liquidity .  Excess Availability (as of any date of determination, " Liquidity "), of least $1,250,000 at any time; provided that if Liquidity shall on any Business Day be less than $1,250,000 when Liquidity was at least $1,250,000 on the preceding Business Day (each such event, a " Liquidity Event "), with respect to the first two Liquidity Events occurring after April 3, 2015 (it being understood that if a third Liquidity Event occurs after April 3, 2015, an immediate Event of Default which may not be cured shall exist) any Event of Default arising as a result of a breach of this Section 7.20(c)(i) shall be deemed cured, so long as Liquidity at no time is less than $1,050,000 (it being understood that if Liquidity is less than $1,050,000 at any time, an immediate Event of Default which may not be cured shall exist), in the event that Liquidity thereafter increases to no less than $1,250,000 within 2 Business Days following the date of the occurrence of such Liquidity Event. (q)              Section 8.9 of the Loan Agreement is hereby amended and restated in its entirety as follows:
 
8.9   If there is (a) a default in any material agreement to which any Company or any of its Subsidiaries is a party and such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the applicable Company's or its Subsidiaries' obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein, or (b) a default under the Porter Subordinated Debt Documents;

(r)              Section 8 of the Loan Agreement is hereby amended to add a new Section 8.16 as follows:
 
8.16   If any Company or any holder of the Porter Subordinated Debt or the Porter Subordinated Debt Documents breaches any provision of any Porter Subordination Agreement.

(s)              Schedule C-1 of the Loan Agreement is hereby amended and restated in its entirety as set forth on Exhibit A attached hereto.
(t)              Schedule 5.20 of the Loan Agreement is hereby amended and restated in its entirety as set forth on Exhibit B attached hereto.
 
4.              Ratification .  This Amendment, subject to satisfaction of the conditions set forth in Section 4 hereof, shall constitute an amendment to the Loan Agreement and all of the Loan Documents as appropriate to express the agreements contained herein.  Except as specifically set forth herein, the Loan Agreement and the Loan Documents shall remain unchanged and in full force and effect in accordance with their original terms.
 
5.              Conditions to Effectiveness .  This Amendment shall become effective upon the satisfaction of the following conditions precedent:
(a)              Each party hereto shall have executed and delivered this Amendment to Agent;
(b)              Companies shall have delivered to Agent the documents set forth on the closing checklist attached as Exhibit C hereto, and such other documents, agreements and instruments as may be requested or required by Agent in connection with this Amendment, each in form and content acceptable to Agent;
(c)              Agent shall have received $2,500,000 constituting proceeds of the Porter Subordinated Debt funded on the date hereof in a Cash Management Account at Wells Fargo, which proceeds shall be promptly applied by Agent to the outstanding amount of Advances (such application of proceeds will not operate to effect a reduction in the Revolver Commitment or Maximum Revolver Amount);
(d)              No Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment;
(e)              Agent shall have received all fees and expenses due under the Loan Documents as of the date hereof (which condition may be satisfied by Agent charging such amounts to the Borrowers' loan account as an Advance on the date hereof); and
(f)              All proceedings taken in connection with the transactions contemplated by this Amendment, the Porter Subordinated Debt Documents and all documents, instruments and other legal matters incident thereto shall be satisfactory to Agent and its legal counsel.
 
6.              Post-Effective Date Covenants .
(a)              Telos covenants and agrees that it shall cause all proceeds of the Porter Subordinated Debt funded after the date hereof to be deposited into a Cash Management Account at Wells Fargo and such proceeds shall be applied to the outstanding amount of Advances (such application of proceeds will not operate to effect a reduction in the Revolver Commitment or Maximum Revolver Amount).
(b)              Within 21 days of closing, Telos covenants and agrees that it shall deliver copies of filed UCC-3 terminations of the following financing statements currently filed in favor of Key Government Finance, Inc., as secured party, in the state of Maryland:  filing numbers 0000000181412385 filed January 14, 2011 (which was amended by UCC financing statement 1000362002913657 filed February 22, 2012) and 0000000181418923 filed April 22, 2011 (such financing statements, collectively, are the "Key Government Finance Filings").  Each Company acknowledges and agrees that the failure of Telos to comply with the covenant in this Section 6(b) shall constitute an immediate Event of Default.
 
7.              Reaffirmation and Confirmation .  Each Company hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of such Company, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Loan Document.  Each Company hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations.  The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by each Company in all respects.
 
8.              Miscellaneous .
(a)              Warranties and Absence of Defaults .  To induce Agent and Lenders to enter into this Amendment, each Company hereby represents and warrants to Agent and Lenders that:
(i)
The execution, delivery and performance by it of this Amendment, the Porter Subordinated Debt Documents and each of the other agreements, instruments and documents contemplated hereby are within its corporate power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to it, its articles of incorporation and by‑laws, any order, judgment or decree of any court or governmental agency, or any agreement, instrument or document binding upon it or any of its property;
(ii)
each of the Loan Agreement and the other Loan Documents, as amended by this Amendment, are the legal, valid and binding obligation of each Company party thereto enforceable against it in accordance with its terms, except as the enforcement thereof may be subject to (A) the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditor's rights generally, and (B) general principles of equity;
(iii)
the representations and warranties contained in the Loan Agreement, the Porter Subordinated Debt Documents and the other Loan Documents are true and accurate as of the date hereof with the same force and effect as if such had been made on and as of the date hereof;
(iv)
each Company has performed all of its obligations under the Loan Agreement, the Porter Subordinated Debt Documents and the other Loan Documents to be performed by it on or before the date hereof and as of the date hereof, it is in compliance with all applicable terms and provisions of the Loan Agreement and each of the Loan Documents to be observed and performed by it and no Event of Default or Default (other than the Existing Default) has occurred; and
(v)
no  Account currently reported by Borrowers as an Eligible Account, or otherwise included in the Borrowing Base, (i) consists of any amount owing to a Borrower that is subject to a Lien in favor of Key Government Finance, Inc. or (ii) was transferred to or is otherwise owned by Key Government Finance, Inc.
(b)              Expenses .  Each Company hereby agrees that Companies, jointly and severally, shall pay on demand all costs and expenses of Agent and each Lender (including the reasonable fees and expenses of outside counsel) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  In addition, each Company hereby agrees that Companies, jointly and severally, shall pay, and save Agent harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith.  All obligations provided herein shall survive any termination of the Loan Agreement as amended hereby.
(c)              Governing Law .  This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois.
(d)              Counterparts .  This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.  Delivery of an executed counterpart of a signature page of this Amendment by facsimile or by electronic transmission of a portable document file (PDF) or similar file shall be effective as delivery of a manually executed counterpart of this Amendment.
 
9.              Release .
(a)              In consideration of the agreements of Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Company on behalf of itself and such Company's successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the "Releasees" and individually as a "Releasee"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set‑off, demands and liabilities whatsoever (individually, a "Claim" and collectively, "Claims") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which such Company or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with the Loan Agreement, any of the Porter Subordinated Debt Documents or any of the other Loan Documents or transactions thereunder or related thereto.
(b)              Each Company hereby acknowledges and agrees that such Company understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.
(c)              Each Company hereby acknowledges and agrees that such Company agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

[signature pages follow]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written.
AGENT AND LENDERS:
 
WELLS FARGO CAPITAL FINANCE, LLC.
(successor by merger to Wells Fargo Capital Finance, Inc.) as Agent and as a Lender
 
By
/s/ Jordan E. Hilliard
Name
 Jordan E. Hilliard
Title
Vice President
   
BORROWERS:
   
TELOS CORPORATION
A Maryland corporation
   
By
/s/ Jefferson V. Wright
Name
Jefferson V. Wright
Title
EVP & General Counsel
   
XACTA CORPORATION
A Delaware corporation
   
By
/s/ Jefferson V. Wright
Name
Jefferson V. Wright
Title
EVP & General Counsel
   
CREDIT PARTIES:
   
UBIQUITY.COM, INC.
A Delaware corporation
   
By
/s/ Jefferson V. Wright
Name
Jefferson V. Wright
Title
EVP & General Counsel
   
TELOWORKS, INC.
A Delaware corporation
   
By
/s/ David S. Easley
Name
David S. Easley
Title
President
EXHIBIT A
Schedule C-1
See attached.
Schedule C‑1


Commitments
 
 
Lender
 
Revolver Commitment
   
Term Loan Commitment*
   
Total Commitment
 
Wells Fargo Capital Finance, LLC
 
$
20,000,000
   
$
4,250,000
1  
 
$
20,000,000
 
All Lenders
 
$
20,000,000
   
$
4,250,000
1  
 
$
20,000,000
 


* The outstanding principal balance of the Term Loan shall reduce Availability on a dollar for dollar basis.
1 The commitment to fund the Term Loan expired upon the making of the Term Loan on the Closing Date and amounts repaid under the Term Loan may not be reborrowed; the amount listed reflects the amount of the Term Loan outstanding as of the Twelfth Amendment Closing Date.
EXHIBIT B

Schedule 5.20
See attached.
 
Schedule 5.20

Existing Indebtedness

See attached spreadsheet of lease commitments.
 
TELOS CORPORATION
                     
                       
OFFICE LESSOR / SUBLESSOR
DESCRIPTION
CITY
STATE
START DATE
END DATE
 
2014
   
2015
   
2016
 
3655 ALAMO PARK PLAZA, LLC (JACK AND DORA GLASER FAMILY TRUST)
3655 ALAMO STREET, SUITES # 300,301&303
SIMI VALLEY
CA
03/01/06
10/31/15
   
75,144.00
     
62,620.00
     
PROGRESS PARTNERS LLC
8215 Madison Blvd Suite 130
MADISON
AL
01/01/10
12/31/15
   
15,156.00
     
15,156.00
     
ST JOHN PROPERTIES, INC
6245 Guardian Gateway, Suit 118
ABERDEEN PROVING GR
MD
11/01/10
02/29/16
   
64,714.60
     
66,656.08
     
11,163.54
 
LEIDOS(SAIC)
360 Comand View
COLORADO SPRINGS
CO
01/01/11
08/31/14
   
9,611.28
     
3,203.76
         
OSTEOCARE, LLC
145 Wyckoff Road
EATONTOWN
NJ
04/01/11
07/31/16
   
187,149.88
     
189,807.64
     
111,625.50
 
ARMAND PLACE LLC
2112 BIENVILLE BLVD #B-2
OCEAN SPRINGS
MS
08/01/11
08/31/14
   
20,400.00
                 
ST JOHN PROPERTIES/ Attn:MAPLE LAWN OFFICE III, LLC
8161  MAPLE LAWN BLVD  SUITE 201
FULTON
MD
05/01/13
01/31/24
   
244,338.80
     
251,669.00
     
259,219.08
 
Metropolitan at Village at Leesburg
1500 Balch Drive SE #212
LEESBURG
VA
10/28/13
05/27/15
   
20,140.00
     
8,600.00
         
TELOSCO
19886 ASHBURN ROAD
ASHBURN
VA
06/01/14
10/31/26
   
1,661,862.60
     
1,807,744.00
     
1,852,937.60
 
TOTAL OFFICE LEASES
               
$
2,298,517
   
$
2,405,456
   
$
2,234,946
 
                                   
                                   
EQUIPMENT LESSOR
                                 
Pitney Bowes Global Financial
DM400C Digital Postage Meter
ASHBURN
VA
Apr-12
Jul-17
   
1,236.00
     
1,236.00
     
1,236.00
 
Wells Fargo Equipment Finance
Network Equipment Ashburn IT Dept
ASHBURN
VA
Dec-12
Nov-15
   
31,572.48
     
28,941.44
         
Canon Financial Services Inc
Copiers Lease, Ashburn, NJ, MD
ASHBURN, NJ, MD
VA
Jul-13
Jun-18
   
28,004.28
     
28,004.28
     
28,004.28
 
TOTAL EQUIPMENT LEASES
               
$
60,813
   
$
58,182
   
$
29,240
 
                                   
                                   
TOTAL OFFICE & EQUIPMENT LEASES
            
$
2,359,330
   
$
2,463,638
   
$
2,264,186
 
 
 
 
OFFICE LESSOR / SUBLESSOR
DESCRIPTION
 
2017
   
2018
   
2019
   
2021
   
2022
   
2023
 
3655 ALAMO PARK PLAZA, LLC (JACK AND DORA GLASER FAMILY TRUST)
3655 ALAMO STREET, SUITES # 300,301&303
                 
PROGRESS PARTNERS LLC
8215 Madison Blvd Suite 130
                       
ST JOHN PROPERTIES, INC
6245 Guardian Gateway, Suit 118
                       
LEIDOS(SAIC)
360 Comand View
                       
OSTEOCARE, LLC
145 Wyckoff Road
                       
ARMAND PLACE LLC
2112 BIENVILLE BLVD #B-2
                       
ST JOHN PROPERTIES/ Attn:MAPLE LAWN OFFICE III, LLC
8161  MAPLE LAWN BLVD  SUITE 201
   
266,995.64
     
275,005.48
     
283,255.60
     
300,505.80
     
309,520.96
     
318,806.60
 
Metropolitan at Village at Leesburg
1500 Balch Drive SE #212
                                               
TELOSCO
19886 ASHBURN ROAD
   
1,899,261.04
     
1,946,742.58
     
1,995,411.13
     
2,096,428.82
     
2,148,839.52
     
2,202,560.49
 
TOTAL OFFICE LEASES
   
$
2,166,257
   
$
2,221,748
   
$
2,278,667
   
$
2,396,935
   
$
2,458,360
   
$
2,521,367
 
                                                   
                                                   
EQUIPMENT LESSOR
                                                 
Pitney Bowes Global Financial
DM400C Digital Postage Meter
   
927.00
                                         
Wells Fargo Equipment Finance
Network Equipment Ashburn IT Dept
                                         
Canon Financial Services Inc
Copiers Lease, Ashburn, NJ, MD
   
28,004.28
     
14,002.14
                                 
TOTAL EQUIPMENT LEASES
   
$
28,931
   
$
14,002
   
$
0
   
$
0
   
$
0
   
$
0
 
                                                   
                                                   
TOTAL OFFICE & EQUIPMENT LEASES
 
$
2,195,188
   
$
2,235,750
   
$
2,278,667
   
$
2,396,935
   
$
2,458,360
   
$
2,521,367
 
 
                         
LEASE FILE
   
SQUARE
 
OFFICE LESSOR / SUBLESSOR
DESCRIPTION
 
2024
   
2025
   
2026
   
2028
   
2029
     
#
   
FEET
 
3655 ALAMO PARK PLAZA, LLC (JACK AND DORA GLASER FAMILY TRUST)
3655 ALAMO STREET, SUITES # 300,301&303
                         
3,093
 
PROGRESS PARTNERS LLC
8215 Madison Blvd Suite 130
                               
1,167
 
ST JOHN PROPERTIES, INC
6245 Guardian Gateway, Suit 118
                               
2,768
 
LEIDOS(SAIC)
360 Comand View
                                   
OSTEOCARE, LLC
145 Wyckoff Road
                               
10,631
 
ARMAND PLACE LLC
2112 BIENVILLE BLVD #B-2
                                   
ST JOHN PROPERTIES/ Attn:MAPLE LAWN OFFICE III, LLC
8161  MAPLE LAWN BLVD  SUITE 201
   
26,827.68
                             
7,224
 
Metropolitan at Village at Leesburg
1500 Balch Drive SE #212
                                       
TELOSCO
19886 ASHBURN ROAD
   
2,257,624.50
     
2,314,065.16
     
2,371,916.78
     
2,491,995.05
     
1,048,991.75
             
191,700
 
TOTAL OFFICE LEASES
   
$
2,284,452
   
$
2,314,065
   
$
2,371,917
   
$
2,491,995
   
$
1,048,992
             
3,093
 
                                                           
                                                           
EQUIPMENT LESSOR
                                                         
Pitney Bowes Global Financial
DM400C Digital Postage Meter
                                                       
Wells Fargo Equipment Finance
Network Equipment Ashburn IT Dept
                                                 
Canon Financial Services Inc
Copiers Lease, Ashburn, NJ, MD
                                                       
TOTAL EQUIPMENT LEASES
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
                 
                                                           
                                                           
TOTAL OFFICE & EQUIPMENT LEASES
 
$
2,284,452
   
$
2,314,065
   
$
2,371,917
   
$
2,491,995
   
$
1,048,992
                 
 
 
 
EXHIBIT C
Closing Checklist
See attached.
 
CLOSING CHECKLIST
Amendment and Extension to
Second Amended and Restated of Loan and Security Agreement by
Wells Fargo Capital Finance, LLC
to
Telos Corporation and Xacta Corporation
Closing Date :  March 31, 2015

I.              Parties :
A.
Wells Fargo Capital Finance, LLC (successor by merger to Wells Fargo Capital Finance, Inc., formerly known as Wells Fargo Foothill, Inc.) ("WFCF"), individually and as Agent ("Agent")
One Boston Place, 18th Floor
Boston, Massachusetts  02108
Telephone: (617) 624-4438
Facsimile: (617) 523-1697
B.
Telos Corporation ("Telos")
Xacta Corporation ("Xacta"; together with Telos, "Borrowers")
19886 Ashburn Road
Ashburn, Virginia  20147
C.
Ubiquity.com, Inc. ("Ubiquity")
Teloworks, Inc. ("Teloworks"; together with, Ubiquity, "Credit Parties")
19886 Ashburn Road
Ashburn, Virginia  20147
II.              Counsel to Parties :
A.
WFCF:

Goldberg Kohn Ltd.
55 East Monroe Street
Suite 3300
Chicago, Illinois 60603
Telephone: (312) 201-4000
Facsimile: (312) 332-2196
B.
Borrowers and Credit Parties:

Helen Oh
Assistant General Counsel
Telos Corporation
19886 Ashburn Road
Ashburn, Virginia  20147
Telephone: (703) 726-2270
Facsimile: (703) 724-1468
III.              Closing documents :
A. Items pertaining to Borrowers and Credit Parties:
1.
Twelfth Amendment to Second Amended and Restated Loan and Security Agreement
2.
Reaffirmation of Loan Documents
i)
Amended and Restated Guarantee of Credit Parties
ii)
Collateral Assignment of Business Interruption Insurance
iii)
Cash Management Agreements
iv)
Intercompany Subordination Agreement
v)
Telos Trademark Mortgage
vi)
Telos Copyright Mortgage
vii)
Telos Patent Mortgage
viii)
Telos Stock Pledge Agreement
ix)
Xacta Trademark Mortgage
x)
Ubiquity Stock Pledge Agreement
3.
Supplemental Fee Letter
B. Items Pertaining to Telos :
4.
Secretary's Certificate with respect to resolutions of directors, incumbency of officers, bylaws and certified Articles of Incorporation
5.
Certificate of good standing in its jurisdiction of organization
C. Items Pertaining to Xacta :
6.
Secretary's Certificate with respect to resolutions of directors, incumbency of officers, bylaws and certified Certificate of Incorporation
7.
Certificate of good standing in its jurisdiction of organization
D. Items Pertaining to Ubiquity :
8.
Secretary's Certificate with respect to resolutions of directors, incumbency of officers, bylaws and certified Certificate of Incorporation
9.
Certificate of good standing in its jurisdiction of organization
E. Items Pertaining to Teloworks :
10.
Secretary's Certificate with respect to resolutions of directors, incumbency of officers, bylaws and certified Certificate of Incorporation
11.
Certificate of good standing in its jurisdiction of organization
F. Items Pertaining to New Shareholder Subordinated Note
12.
Subordination Agreements
i)
Porter Foundation Switzerland
ii)
JP Charitable Foundation
13.
Subordinated Loan Agreements
i)
Porter Foundation Switzerland
ii)
JP Charitable Foundation
14.
Subordinated Promissory Notes (for up to $5,000,000, in the aggregate)
i)
Porter Foundation Switzerland
ii)
JP Charitable Foundation
G. Other Items :
15.
Opinion of counsel to Borrowers and Credit Parties
16.
Extensions to standby agreements from holders of 70% of private preferred stock
 
 

Exhibit 10.37

THIS SUBORDINATED LOAN AGREEMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AND INTERCREDITOR AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF MARCH 31, 2015 AMONG PORTER FOUNDATION SWITZERLAND, TELOS CORPORATION, XACTA CORPORATION, UBQUITY.COM, INC. AND TELOWORKS, INC. (COLLECTIVELY, THE "COMPANIES") AND WELLS FARGO CAPITAL FINANCE, LLC ("AGENT"), TO THE INDEBTEDNESS (INCLUDING INTEREST) OWED BY TELOS CORPORATION AND XACTA CORPORATION (AND GUARANTIED BY UBIQUITY.COM, INC. AND TELOWORKS, INC.) PURSUANT TO THAT CERTAIN SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED AS OF MAY 17, 2010 AMONG THE COMPANIES, AGENT AND THE LENDERS FROM TIME TO TIME PARTY THERETO AND THE OTHER SENIOR DEBT DOCUMENTS (AS DEFINED IN THE SUBORDINATION AGREEMENT), AS SUCH   CREDIT AGREEMENT AND OTHER SENIOR DEBT DOCUMENTS HAVE BEEN AND HEREAFTER MAY BE AMENDED, SUPPLEMENTED, RESTATED, AMENDED AND RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME AND TO INDEBTEDNESS REFINANCING THE INDEBTEDNESS UNDER THOSE AGREEMENTS AS CONTEMPLATED BY THE SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.

SUBORDINATED LOAN AGREEMENT
THIS SUBORDINATED LOAN AGREEMENT (this " Agreement ") is made as of March 31, 2015 (the " Closing Date "), by and among Telos Corporation (the " Borrower "), with an address of 19886 Ashburn Road, Ashburn, VA 20147, in favor of Porter Foundation Switzerland , with an address of Chemin d'Amon 2, Chalet Ty'Fano, 1936 Verbier, Switzerland (referred to herein as " Lender ").
RECITALS
A.              The Borrower has requested that Lender provide a term loan, which might be funded through multiple fundings or advances (with no funding or advance to be made later than May 15, 2015), in the amount of up to Five Million Dollars ($5,000,000) (less the amount of any amounts funded to the Borrower from time to time by the JP Charitable Foundation under its Subordinated Note and Subordinated Loan Agreement (the "Other Loan Documents") of even date herewith) in the aggregate (the " Loan ").
B.
The Lender is willing to provide the Loan on the condition that the Borrower enters into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements of the parties contained in this Agreement, the parties agree as follows:
1.
Definitions; Interpretation .
1.1
Definitions.  Capitalized terms not otherwise defined in this Section shall have the meaning set forth or provided for elsewhere in this Agreement.   As used in this Agreement, the term:
" Business Day " means any day other than a Saturday, Sunday or other day on which commercial banks in the State of Maryland are authorized or required to close.
" Governmental Authority " means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any department, agency or instrumentality thereof.
" Laws " means, collectively, laws, ordinances, statutes, rules, regulations, orders, injunctions, rule of common law, judicial interpretation, writs, or decrees of any Governmental Authority.
" Loan Documents " means this Agreement, any and all promissory notes and any and all other documents, instruments, certificates, agreements, loan agreements, subordination agreements, or other contracts with or for the benefit of the Lender, evidencing or governing payment of the Loan and the Obligations.
" Note " means the subordinated promissory note described in Section 2, as amended, restated, substituted or replaced from time to time.
" Obligations " means all present and future indebtedness, duties, obligations, and liabilities of the Borrower to the Lender with respect to the Loan in accordance with the terms of the Loan Documents.
" Person " means and includes an individual, a corporation, a partnership, a joint venture, a limited liability company or partnership, a trust, an unincorporated association, a Governmental Authority, or any other organization or entity.
" Refinancing Senior Debt Agreements " shall mean any agreements, instruments and documents which evidence the refinancing or replacement of any of the Senior Debt.
" Senior Agent " shall mean Wells Fargo Capital Finance, LLC or such other person that may from time to time be the administrative agent under the Senior Debt Agreements.
" Senior Credit Agreement " shall mean that certain Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 among the Borrower, certain of Borrower's affiliates, the financial institutions party thereto from time to time as Senior Lenders and Wells Fargo Capital Finance, LLC ("Wells Fargo"), as Senior Agent for all Senior Lenders, as the same has been and may subsequently be amended, restated, amended and restated, supplemented or otherwise modified from time to time.

" Senior Debt " shall mean all Indebtedness of every nature of the Borrower from time to time owing under the Senior Debt Agreements, including, without limitation, the principal amount of all debts, claims and indebtedness, contingent reimbursement obligations (including without limitation in connection with cash management obligations and hedging, swap, foreign exchange, and other similar obligations and liabilities), accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after an Insolvency Proceeding together with any interest, fees or expenses accruing thereon after the commencement of an Insolvency Proceeding, without regard to whether or not such interest, fees or expenses are an allowed claim; Senior Debt shall be considered to be outstanding whenever any loan commitment under the Senior Debt Agreements is outstanding.
" Senior Debt Agreements " shall mean (i) the Senior Credit Agreement, together with any agreements, instruments and documents related thereto and executed in connection therewith, and (ii) any Refinancing Senior Debt Agreements, in each case as such agreements, instruments and documents may be amended or modified from time to time.
" Senior Lenders " means the Persons from time to time party to the Senior Debt Agreements as "lenders" together with such other Persons as may from time to time constitute "Bank Product Providers" under the Senior Debt Agreements.
" Stock " means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of the Borrower, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11- 1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).
" Subordination Agreement " means (a) that certain Subordination and Intercreditor Agreement dated as of even date herewith by and among the Borrower, certain affiliates of Borrower, Lender and Senior Agent, as the same may be amended, restated, substituted, replaced or otherwise modified from time to time, (b) any other subordination agreement which may be required by the Senior Agent or Senior Lenders, as the same may be amended, restated, substituted, replaced or otherwise modified from time to time.
1.2
Interpretation .  The Recitals accurately state the facts, circumstances and intentions of the parties and are hereby incorporated in this Agreement by this reference and made a part hereof.  The headings in this Agreement are included in this Agreement for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof.  As used in this Agreement, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. References to any one or more of the Loan Documents include the same as amended, restated, modified, substituted, extended and renewed from time to time.
2.
The Loan .
(a)            The Lender hereby agrees to provide the Loan, as follows: (i) proceeds of the Loan in an amount equal to One Million Two Hundred and Fifty Thousand Dollars ($1,250,00.00) on the Closing Date, shall be disbursed by Lender to Borrower on the Closing Date, and (ii) upon further mutual agreement of the Lender and Borrower, proceeds of the Loan in an amount equal to an additional sum of up to Two Million Five Hundred Thousand Dollars ($2,500,00.00), less any amount Borrower borrows from JP Charitable Foundation under the Other Loan Documents shall be disbursed by Lender to Borrower following the date hereof on a date to be mutually agreed between Lender and Borrower but which date shall in any event be on or prior to May 15, 2015 .  To evidence the Loan and the terms of repayment thereof with interest, the Borrower agrees to execute a Subordinated Promissory Note dated as of even date herewith.
 
(b)            The Lender shall make all advances under the Loan by transfer of funds to a deposit account of the Borrower in accordance with Borrower's directions, or such other manner as requested by Borrower, each at the Borrower's option.
 
3.      Representations and Warranties .  The Borrower represents and warrants to the Lender on the date of this Agreement, as follows:
3.1
Borrower is in good standing in the state of its incorporation. The Borrower has full power and authority to borrow the proceeds of the Loan, to execute and deliver the Loan Documents, and to incur and perform the Obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body the Borrower.
3.2
This Agreement and the other Loan Documents executed and delivered by the Borrower have been properly executed and delivered and constitute the valid and legally binding obligations of the Borrower and are enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other Laws of general application affecting the rights and remedies of creditors, and general principles of equity regardless of whether applied in a proceeding in equity or at law.
4.
Covenants .
4.1
The Borrower shall maintain its organizational existence in good standing in its jurisdiction of incorporation.
4.2
Until full and final payment of the Obligations, the Borrower shall not make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, exchange for indebtedness, or retire any Stock, of any class, whether now or hereafter outstanding (provided that, (a) consistent with the Pension Protection Act of 2006, and Section 401(a)(35) of the Internal Revenue Code and regulations pertaining thereto, the Borrower may purchase common Stock from the Telos 401(k) plan participants at a purchase price determined in good faith by the trustees of the Telos 401(k) plan).
5.      Default .  The Borrower shall be in default under this Agreement upon the occurrence of any one or more of the following (each an " Event of Default "): (a) there occurs any failure to pay any amounts due under the Loan or the other Obligations within ten (10) Business Days after the date when any such amount is due (unless such amounts were not permitted to be paid pursuant to the Subordination Agreement, in which case no Event of Default or other breach of this Agreement or any other Loan Document shall be deemed to have occurred as a result of the failure to make any such payment); or (b) any representation or warranty made in this Agreement shall prove to have been false or misleading when made in any material respect; or (c) the Borrower fails to timely and properly observe, keep or perform, any term, covenant, agreement or condition in this Agreement or in any of the other Loan Documents, which failure is not cured within thirty (30) Business Days from notice by Lender of such failure; or (d) the Borrower terminates its business operations or liquidates, dissolves or terminates its existence; or (e) the Borrower (i) admits in writing its inability generally to pay its debts as they mature or shall make any assignment for the benefit of any of its creditors, or (ii) is the subject of federal or state bankruptcy, insolvency, receivership or trustee proceedings; provided, however, that it shall not be an Event of Default under this clause (ii) if any involuntary proceeding is commenced against Borrower that is dismissed or stayed within ninety (90) days after the filing of the proceeding.
 
6.      Remedies .  During the continuance of an Event of Default, the Lender may, in the exercise of its discretion, declare all the rest or any portion of the Note and all other Obligations remaining unpaid, whether due or not, immediately due and payable, and exercise its rights and remedies under applicable Laws and as otherwise set forth in the Loan Documents.
7.
Other Agreements .
7.1
All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing, hand delivered, sent by nationally recognized overnight courier or mailed, first class postage prepaid, addressed to the Lender and to the Borrower, at the addresses set forth in the initial paragraph to this Agreement, or to such other address as any party may designate by written notice to the other party.  Each such notice, request and demand shall be deemed given or made as follows: (i) if sent by hand delivery or by nationally recognized overnight courier service, upon delivery; or (ii) if sent by mail, first class postage prepaid, upon the earlier of the date of receipt or five (5) days after deposit with the U.S. Postal Service or a national postal service.
7.2
The rights, powers and remedies provided in this Agreement and the other Loan Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Lender shall determine, and are in addition to, and not exclusive of, rights, powers and remedies provided by applicable Laws.
7.3
This Agreement shall be binding upon and inure to the benefit of the parties and of their respective successors and assigns.
7.4
This Agreement shall be governed by and construed in accordance with the Laws of the State of Maryland, without regard to conflicts of law principles.  The Lender and Borrower hereby consent to the exclusive jurisdiction of any state or federal court located within the County of Fairfax or Loudoun, Commonwealth of Virginia and irrevocably agrees that all actions or proceedings arising out of or relating to this note shall be litigated in such courts.  The Lender and Borrower expressly submit and consent to the jurisdiction of the aforesaid courts and waive any defense of forum non conveniens.  The Lender and Borrower hereby waive personal service of any and all process and agree that all such service of process may be made upon it by certified or registered mail, return receipt requested, addressed to either party at their respective addresses set forth in this Agreement and service so made shall be complete ten (10) days after the same has been posted.
7.5
In the event any one or more provisions of this Agreement shall be determined to be invalid or unenforceable by any court of competent jurisdiction, the remaining provisions hereof, to the maximum extent possible, shall be deemed nevertheless to continue to be valid, legal, and enforceable, shall continue in full force and effect, and shall not be affected or impaired thereby.
7.6
This Agreement may be modified, changed or amended only in writing executed by the parties.
8.      WAIVER OF RIGHT TO JURY TRIAL.  THE BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO THIS SUBORDINATED LOAN AGREEMENT AND/OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING THE NOTE).  IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF THE IMPORTANT RIGHT OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST THIRD PARTIES WHO ARE NOT PARTIES TO THIS NOTE.  THIS WAIVER IS KNOWINGLY, WILLINGLY, AND VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND EACH HEREBY REPRESENTS TO THE OTHER THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  EACH OF THE BORROWER AND THE LENDER HEREBY FURTHER REPRESENT TO THE OTHER THAT IT HAS HAD THE OPPORTUNITY TO BE REPRESENTED AND ADVISED BY LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
 
9.      Confidential Information.   Lender agrees that non-public information regarding the Borrowers, their operations, assets, owners, employees, affiliates, pricing, customer lists, and existing and contemplated business plans (collectively, the " Confidential Information ") shall be treated by Lender in a confidential manner, and shall not be disclosed by Lender to Persons who are not parties to this Agreement, except: (i) to attorneys for and other advisors, accountants, auditors, and consultants to Lender on a "need to know" basis in connection with this Agreement and the transactions contemplated hereby and on a confidential basis, (ii) as may be required by statute, decision, or judicial or administrative order, rule, or regulation; provided, that, prior to any disclosure this clause, the disclosing party agrees to provide Borrower with prior notice thereof, to the extent that the disclosing party is permitted to provide such prior notice to Borrower pursuant to the policies of such regulatory authority or terms of the applicable statute, decision, or judicial or administrative order, rule, or regulation, (iii) as requested or required by any Governmental Authority pursuant to any subpoena or other legal process; provided, that, (A) prior to any disclosure under this clause (iii) the disclosing party agrees to provide Borrower with prior written notice thereof, to the extent that the disclosing party is permitted to provide such prior written notice to Borrower pursuant to the terms of the subpoena or other legal process, (iv) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Lender), (v) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement and the other Loan Documents; provided, that, prior to any disclosure to any Person under this clause (vi) with respect to litigation involving any Person, the disclosing party agrees to provide Borrower with prior written notice thereof, and (vii) in connection with, and to the extent reasonably necessary for, the exercise of any remedy under this Agreement or under any other Loan Document.
 
10.      Subordination of Loan to Senior Debt.   This Agreement, the related Subordinated Promissory Note, and the obligations and indebtedness evidenced under this Agreement and Note, are subordinated to the Senior Debt of the Borrower and its subsidiaries or affiliates, including specifically the obligations of the Borrower and certain of its subsidiaries and affiliates under the Senior Credit Agreement, the Senior Debt Agreements, and any Refinancing Senior Debt Agreements.  The Lender and any subsequent party to this Agreement or subsequent holder of the Subordinated Promissory Note agree that the Note, this Agreement and the obligations and indebtedness evidenced by the Note shall be subordinated to the Senior Debt, including specifically the Senior Credit Agreement, the Senior Debt Agreements, and any Refinancing Senior Debt Agreements, in accordance with the provisions of the Subordination Agreement, and the Lender and each other holder of the Promissory Note accepts and agrees to be bound in all respects by the terms of such Subordination Agreement.
[Signatures Follow on Next Page]

BORROWER'S SIGNATURE PAGE TO SUBORDINATED LOAN AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.
BORROWER:

Telos Corporation


By
/s/ John B. Wood
Name
John B. Wood
Title
Chairman of the Board and Chief Executive Officer
LENDER'S SIGNATURE PAGE TO SUBORDINATED LOAN AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.
LENDER:

Porter Foundation Switzerland



/s/ John R.C. Porter
John R.C. Porter, Trustee
 
 
/s/ Brian Padgett
Brian Padgett, Trustee

Exhibit 10.38

THIS SUBORDINATED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN EXEMPTION THEREFROM.
THIS SUBORDINATED PROMISSORY NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AND INTERCREDITOR AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF MARCH 31, 2015 AMONG PORTER FOUNDATION SWITZERLAND, TELOS CORPORATION, XACTA CORPORATION, UBQUITY.COM, INC. AND TELOWORKS, INC. (COLLECTIVELY, THE "COMPANIES") AND WELLS FARGO CAPITAL FINANCE, LLC ("AGENT"), TO THE INDEBTEDNESS (INCLUDING INTEREST) OWED BY TELOS CORPORATION AND XACTA CORPORATION (AND GUARANTIED BY UBIQUITY.COM, INC. AND TELOWORKS, INC.) PURSUANT TO THAT CERTAIN SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED AS OF MAY 17, 2010 AMONG THE COMPANIES, AGENT AND THE LENDERS FROM TIME TO TIME PARTY THERETO AND THE OTHER SENIOR DEBT DOCUMENTS (AS DEFINED IN THE SUBORDINATION AGREEMENT), AS SUCH   CREDIT AGREEMENT AND OTHER SENIOR DEBT DOCUMENTS HAVE BEEN AND HEREAFTER MAY BE AMENDED, SUPPLEMENTED, RESTATED, AMENDED AND RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME AND TO INDEBTEDNESS REFINANCING THE INDEBTEDNESS UNDER THOSE AGREEMENTS AS CONTEMPLATED BY THE SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.
MARCH 31, 2015
SUBORDINATED PROMISSORY NOTE
FOR VALUE RECEIVED Telos Corporation,(the " Borrower "), promises to pay to the Porter Foundation Switzerland , with an address of Chemin d'Amon 2, Chalet Ty'Fano, 1936 Verbier, Switzerland   (the " Lender "), the principal sum of up to Five Million Dollars ($5,000,000) in aggregate (less any amount Borrower has borrowed from JP Charitable Foundation), or such lesser amount as may be outstanding under the Loan (defined in the Loan Agreement (defined herein)) pursuant to the terms and conditions of the Loan Agreement (such amount, the " Principal Sum "), together with interest thereon at the rate or rates hereinafter provided, in accordance with the terms set forth herein.
Capitalized terms not otherwise defined herein (including terms set forth in the header hereto) shall have the meanings set forth in the Loan Agreement.
Commencing as of the date of the funding of the loan proceeds by Lender to Borrower (or, in the event of multiple instances of funding, the date of each such funding as to the particular amount funded) and continuing until repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear interest at the fixed rate of twelve percent (12%) per annum payable in arrears in cash on the 20th day of each May, August, November and February (each, an " Interest Payment Date ").  The first Interest Payment Date shall be August 20, 2015.
All interest payable under the terms of this Subordinated Promissory Note (this " Note ") shall be calculated on the basis of a 365-day year and the actual number of days elapsed.
Unless sooner paid, the unpaid Principal Sum, together with interest accrued and unpaid thereon, shall be due and payable in full on July 1, 2017.
All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds at such places as the Lender may from time to time designate in writing to the Borrower.
The Borrower may prepay the Principal Sum in whole or in part at any time without premium or penalty.
This Note is the "Note" or "Promissory Note" or "Subordinated Promissory Note" described in that certain Loan Agreement of even date herewith by and among the Borrower and the Lender (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the " Loan Agreement ").  The Borrower agrees that the Lender, with respect to this Note, shall have the benefit of the provisions of the Loan Agreement that apply to the Loan Documents, as defined in the Loan Agreement.
Upon the occurrence of any Event of Default, at the option of the Lender, all amounts payable by the Borrower to the Lender under the terms of this Note shall immediately become due and payable by the Borrower to the Lender upon written demand from Lender to Borrower, and the Lender shall have all of the rights, powers, and remedies available under the terms of this Note, the Loan Agreement and all applicable Laws, subject to the provisions of the Subordination Agreement.
The Borrower shall not make or be required to make any payments in respect of this Note that are prohibited under the Subordination Agreement and shall not be deemed to be in breach of or default under this Note for failing to make a payment to Lender that is prohibited to be made under the Subordination Agreement.
THE BORROWER AND LENDER ACKNOWLEDGE AND AGREE THAT THIS NOTE SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
THE PARTIES HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF FAIRFAX OR LOUDOUN, COMMONWEALTH OF VIRGINIA AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE LITIGATED IN SUCH COURTS.  EACH PARTY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.  EACH PARTY HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO EITHER PARTY AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS NOTE AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.
THE BORROWER AND THE LENDER, BY THEIR ACCEPTANCE HEREOF, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING THE LOAN AGREEMENT).  IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF THE IMPORTANT RIGHT OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE.  THIS WAIVER IS KNOWINGLY, WILLINGLY, AND VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND EACH HEREBY REPRESENTS TO THE OTHER THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  EACH OF THE BORROWER AND THE LENDER HEREBY FURTHER REPRESENT TO THE OTHER THAT IT HAS HAD THE OPPORTUNITY TO BE REPRESENTED AND ADVISED BY LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, IN THE SIGNING OR ACCEPTANCE OF THIS NOTE AND IN THE MAKING OF THIS WAIVER, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
[Signatures Follow on Next Page]

SIGNATURE PAGE TO SUBORDINATED PROMISSORY NOTE
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly authorized representative as of the date first written above.
BORROWER:


TELOS CORPORATION


By
/s/ John B. Wood
Name
John B. Wood
Title
Chairman of the Board and Chief Executive Officer


Exhibit 10.39

THIS SUBORDINATED LOAN AGREEMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AND INTERCREDITOR AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF MARCH 31, 2015 AMONG JP CHARITABLE FOUNDATION, TELOS CORPORATION, XACTA CORPORATION, UBQUITY.COM, INC. AND TELOWORKS, INC. (COLLECTIVELY, THE "COMPANIES") AND WELLS FARGO CAPITAL FINANCE, LLC ("AGENT"), TO THE INDEBTEDNESS (INCLUDING INTEREST) OWED BY TELOS CORPORATION AND XACTA CORPORATION (AND GUARANTIED BY UBIQUITY.COM, INC. AND TELOWORKS, INC.) PURSUANT TO THAT CERTAIN SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED AS OF MAY 17, 2010 AMONG THE COMPANIES, AGENT AND THE LENDERS FROM TIME TO TIME PARTY THERETO AND THE OTHER SENIOR DEBT DOCUMENTS (AS DEFINED IN THE SUBORDINATION AGREEMENT), AS SUCH   CREDIT AGREEMENT AND OTHER SENIOR DEBT DOCUMENTS HAVE BEEN AND HEREAFTER MAY BE AMENDED, SUPPLEMENTED, RESTATED, AMENDED AND RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME AND TO INDEBTEDNESS REFINANCING THE INDEBTEDNESS UNDER THOSE AGREEMENTS AS CONTEMPLATED BY THE SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.

SUBORDINATED LOAN AGREEMENT
THIS SUBORDINATED LOAN AGREEMENT (this " Agreement ") is made as of March 31, 2015 (the " Closing Date "), by and among Telos Corporation (the " Borrower "), with an address of 19886 Ashburn Road, Ashburn, VA 20147, in favor of the JP Charitable Foundation , with an address of Chemin d'Amon 2, Chalet Ty'Fano, 1936 Verbier, Switzerland (referred to herein as " Lender ").
RECITALS
A.              The Borrower has requested that Lender provide a term loan, which might be funded through multiple fundings or advances (with no funding or advance to be made later than May 15, 2015), in the amount of up to Five Million Dollars ($5,000,000) (less the amount of any amounts funded to the Borrower from time to time by the Porter Foundation Switzerland under its Subordinated Note and Subordinated Loan Agreement (the "Other Loan Documents") of even date herewith) in the aggregate (the " Loan ").
B.
The Lender is willing to provide the Loan on the condition that the Borrower enters into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements of the parties contained in this Agreement, the parties agree as follows:
1.
Definitions; Interpretation .
1.1
Definitions.  Capitalized terms not otherwise defined in this Section shall have the meaning set forth or provided for elsewhere in this Agreement.   As used in this Agreement, the term:
" Business Day " means any day other than a Saturday, Sunday or other day on which commercial banks in the State of Maryland are authorized or required to close.
" Governmental Authority " means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any department, agency or instrumentality thereof.
" Laws " means, collectively, laws, ordinances, statutes, rules, regulations, orders, injunctions, rule of common law, judicial interpretation, writs, or decrees of any Governmental Authority.
" Loan Documents " means this Agreement, any and all promissory notes and any and all other documents, instruments, certificates, agreements, loan agreements, subordination agreements, or other contracts with or for the benefit of the Lender, evidencing or governing payment of the Loan and the Obligations.
" Note " means the subordinated promissory note described in Section 2, as amended, restated, substituted or replaced from time to time.
" Obligations " means all present and future indebtedness, duties, obligations, and liabilities of the Borrower to the Lender with respect to the Loan in accordance with the terms of the Loan Documents.
" Person " means and includes an individual, a corporation, a partnership, a joint venture, a limited liability company or partnership, a trust, an unincorporated association, a Governmental Authority, or any other organization or entity.
" Refinancing Senior Debt Agreements " shall mean any agreements, instruments and documents which evidence the refinancing or replacement of any of the Senior Debt.
" Senior Agent " shall mean Wells Fargo Capital Finance, LLC or such other person that may from time to time be the administrative agent under the Senior Debt Agreements.
" Senior Credit Agreement " shall mean that certain Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 among the Borrower, certain of Borrower's affiliates, the financial institutions party thereto from time to time as Senior Lenders and Wells Fargo Capital Finance, LLC ("Wells Fargo"), as Senior Agent for all Senior Lenders, as the same has been and may subsequently be amended, restated, amended and restated, supplemented or otherwise modified from time to time.

" Senior Debt " shall mean all Indebtedness of every nature of the Borrower from time to time owing under the Senior Debt Agreements, including, without limitation, the principal amount of all debts, claims and indebtedness, contingent reimbursement obligations (including without limitation in connection with cash management obligations and hedging, swap, foreign exchange, and other similar obligations and liabilities), accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after an Insolvency Proceeding together with any interest, fees or expenses accruing thereon after the commencement of an Insolvency Proceeding, without regard to whether or not such interest, fees or expenses are an allowed claim; Senior Debt shall be considered to be outstanding whenever any loan commitment under the Senior Debt Agreements is outstanding.
" Senior Debt Agreements " shall mean (i) the Senior Credit Agreement, together with any agreements, instruments and documents related thereto and executed in connection therewith, and (ii) any Refinancing Senior Debt Agreements, in each case as such agreements, instruments and documents may be amended or modified from time to time.
" Senior Lenders " means the Persons from time to time party to the Senior Debt Agreements as "lenders" together with such other Persons as may from time to time constitute "Bank Product Providers" under the Senior Debt Agreements.
" Stock " means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of the Borrower, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11- 1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).
" Subordination Agreement " means (a) that certain Subordination and Intercreditor Agreement dated as of even date herewith by and among the Borrower, certain affiliates of Borrower, Lender and Senior Agent, as the same may be amended, restated, substituted, replaced or otherwise modified from time to time, (b) any other subordination agreement which may be required by the Senior Agent or Senior Lenders, as the same may be amended, restated, substituted, replaced or otherwise modified from time to time.
1.2
Interpretation .  The Recitals accurately state the facts, circumstances and intentions of the parties and are hereby incorporated in this Agreement by this reference and made a part hereof.  The headings in this Agreement are included in this Agreement for convenience only, shall not constitute a part of this Agreement for any other purpose, and shall not be deemed to affect the meaning or construction of any of the provisions hereof.  As used in this Agreement, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. References to any one or more of the Loan Documents include the same as amended, restated, modified, substituted, extended and renewed from time to time.
2.
The Loan .
(a)            The Lender hereby agrees to provide the Loan, as follows: (i) proceeds of the Loan in an amount equal to One Million Two Hundred and Fifty Thousand Dollars ($1,250,00.00) on the Closing Date, shall be disbursed by Lender to Borrower on the Closing Date, and (ii) upon further mutual agreement of the Lender and Borrower, proceeds of the Loan in an amount equal to an additional sum of up to Two Million Five Hundred Thousand Dollars ($2,500,00.00), less any amount Borrower borrows from the Porter Foundation Switzerland under the Other Loan Documents shall be disbursed by Lender to Borrower following the date hereof on a date to be mutually agreed between Lender and Borrower but which date shall in any event be on or prior to May 15, 2015 .  To evidence the Loan and the terms of repayment thereof with interest, the Borrower agrees to execute a Subordinated Promissory Note dated as of even date herewith.
(b)            The Lender shall make all advances under the Loan by transfer of funds to a deposit account of the Borrower in accordance with Borrower's directions, or such other manner as requested by Borrower, each at the Borrower's option.
 
3.      Representations and Warranties .  The Borrower represents and warrants to the Lender on the date of this Agreement, as follows:
3.1
Borrower is in good standing in the state of its incorporation. The Borrower has full power and authority to borrow the proceeds of the Loan, to execute and deliver the Loan Documents, and to incur and perform the Obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body the Borrower.
3.2
This Agreement and the other Loan Documents executed and delivered by the Borrower have been properly executed and delivered and constitute the valid and legally binding obligations of the Borrower and are enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other Laws of general application affecting the rights and remedies of creditors, and general principles of equity regardless of whether applied in a proceeding in equity or at law.
4.
Covenants .
4.1
The Borrower shall maintain its organizational existence in good standing in its jurisdiction of incorporation.
4.2
Until full and final payment of the Obligations, the Borrower shall not make any distribution or declare or pay any dividends (in cash or other property, other than common Stock) on, or purchase, acquire, redeem, exchange for indebtedness, or retire any Stock, of any class, whether now or hereafter outstanding (provided that, (a) consistent with the Pension Protection Act of 2006, and Section 401(a)(35) of the Internal Revenue Code and regulations pertaining thereto, the Borrower may purchase common Stock from the Telos 401(k) plan participants at a purchase price determined in good faith by the trustees of the Telos 401(k) plan).
5.      Default .  The Borrower shall be in default under this Agreement upon the occurrence of any one or more of the following (each an " Event of Default "): (a) there occurs any failure to pay any amounts due under the Loan or the other Obligations within ten (10) Business Days after the date when any such amount is due (unless such amounts were not permitted to be paid pursuant to the Subordination Agreement, in which case no Event of Default or other breach of this Agreement or any other Loan Document shall be deemed to have occurred as a result of the failure to make any such payment); or (b) any representation or warranty made in this Agreement shall prove to have been false or misleading when made in any material respect; or (c) the Borrower fails to timely and properly observe, keep or perform, any term, covenant, agreement or condition in this Agreement or in any of the other Loan Documents, which failure is not cured within thirty (30) Business Days from notice by Lender of such failure; or (d) the Borrower terminates its business operations or liquidates, dissolves or terminates its existence; or (e) the Borrower (i) admits in writing its inability generally to pay its debts as they mature or shall make any assignment for the benefit of any of its creditors, or (ii) is the subject of federal or state bankruptcy, insolvency, receivership or trustee proceedings; provided, however, that it shall not be an Event of Default under this clause (ii) if any involuntary proceeding is commenced against Borrower that is dismissed or stayed within ninety (90) days after the filing of the proceeding.
 
6.      Remedies .  During the continuance of an Event of Default, the Lender may, in the exercise of its discretion, declare all the rest or any portion of the Note and all other Obligations remaining unpaid, whether due or not, immediately due and payable, and exercise its rights and remedies under applicable Laws and as otherwise set forth in the Loan Documents.
7.
Other Agreements .
7.1
All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing, hand delivered, sent by nationally recognized overnight courier or mailed, first class postage prepaid, addressed to the Lender and to the Borrower, at the addresses set forth in the initial paragraph to this Agreement, or to such other address as any party may designate by written notice to the other party.  Each such notice, request and demand shall be deemed given or made as follows: (i) if sent by hand delivery or by nationally recognized overnight courier service, upon delivery; or (ii) if sent by mail, first class postage prepaid, upon the earlier of the date of receipt or five (5) days after deposit with the U.S. Postal Service or a national postal service.
7.2
The rights, powers and remedies provided in this Agreement and the other Loan Documents are cumulative, may be exercised concurrently or separately, may be exercised from time to time and in such order as the Lender shall determine, and are in addition to, and not exclusive of, rights, powers and remedies provided by applicable Laws.
7.3
This Agreement shall be binding upon and inure to the benefit of the parties and of their respective successors and assigns.
7.4
This Agreement shall be governed by and construed in accordance with the Laws of the State of Maryland, without regard to conflicts of law principles.  The Lender and Borrower hereby consent to the exclusive jurisdiction of any state or federal court located within the County of Fairfax or Loudoun, Commonwealth of Virginia and irrevocably agrees that all actions or proceedings arising out of or relating to this note shall be litigated in such courts.  The Lender and Borrower expressly submit and consent to the jurisdiction of the aforesaid courts and waive any defense of forum non conveniens.  The Lender and Borrower hereby waive personal service of any and all process and agree that all such service of process may be made upon it by certified or registered mail, return receipt requested, addressed to either party at their respective addresses set forth in this Agreement and service so made shall be complete ten (10) days after the same has been posted.
7.5
In the event any one or more provisions of this Agreement shall be determined to be invalid or unenforceable by any court of competent jurisdiction, the remaining provisions hereof, to the maximum extent possible, shall be deemed nevertheless to continue to be valid, legal, and enforceable, shall continue in full force and effect, and shall not be affected or impaired thereby.
7.6
This Agreement may be modified, changed or amended only in writing executed by the parties.
8.      WAIVER OF RIGHT TO JURY TRIAL.  THE BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO THIS SUBORDINATED LOAN AGREEMENT AND/OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING THE NOTE).  IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF THE IMPORTANT RIGHT OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST THIRD PARTIES WHO ARE NOT PARTIES TO THIS NOTE.  THIS WAIVER IS KNOWINGLY, WILLINGLY, AND VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND EACH HEREBY REPRESENTS TO THE OTHER THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  EACH OF THE BORROWER AND THE LENDER HEREBY FURTHER REPRESENT TO THE OTHER THAT IT HAS HAD THE OPPORTUNITY TO BE REPRESENTED AND ADVISED BY LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
 
9.      Confidential Information.   Lender agrees that non-public information regarding the Borrowers, their operations, assets, owners, employees, affiliates, pricing, customer lists, and existing and contemplated business plans (collectively, the " Confidential Information ") shall be treated by Lender in a confidential manner, and shall not be disclosed by Lender to Persons who are not parties to this Agreement, except: (i) to attorneys for and other advisors, accountants, auditors, and consultants to Lender on a "need to know" basis in connection with this Agreement and the transactions contemplated hereby and on a confidential basis, (ii) as may be required by statute, decision, or judicial or administrative order, rule, or regulation; provided, that, prior to any disclosure this clause, the disclosing party agrees to provide Borrower with prior notice thereof, to the extent that the disclosing party is permitted to provide such prior notice to Borrower pursuant to the policies of such regulatory authority or terms of the applicable statute, decision, or judicial or administrative order, rule, or regulation, (iii) as requested or required by any Governmental Authority pursuant to any subpoena or other legal process; provided, that, (A) prior to any disclosure under this clause (iii) the disclosing party agrees to provide Borrower with prior written notice thereof, to the extent that the disclosing party is permitted to provide such prior written notice to Borrower pursuant to the terms of the subpoena or other legal process, (iv) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Lender), (v) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement and the other Loan Documents; provided, that, prior to any disclosure to any Person under this clause (vi) with respect to litigation involving any Person, the disclosing party agrees to provide Borrower with prior written notice thereof, and (vii) in connection with, and to the extent reasonably necessary for, the exercise of any remedy under this Agreement or under any other Loan Document.
 
10.      Subordination of Loan to Senior Debt.   This Agreement, the related Subordinated Promissory Note, and the obligations and indebtedness evidenced under this Agreement and Note, are subordinated to the Senior Debt of the Borrower and its subsidiaries or affiliates, including specifically the obligations of the Borrower and certain of its subsidiaries and affiliates under the Senior Credit Agreement, the Senior Debt Agreements, and any Refinancing Senior Debt Agreements.  The Lender and any subsequent party to this Agreement or subsequent holder of the Subordinated Promissory Note agree that the Note, this Agreement and the obligations and indebtedness evidenced by the Note shall be subordinated to the Senior Debt, including specifically the Senior Credit Agreement, the Senior Debt Agreements, and any Refinancing Senior Debt Agreements, in accordance with the provisions of the Subordination Agreement, and the Lender and each other holder of the Promissory Note accepts and agrees to be bound in all respects by the terms of such Subordination Agreement.
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BORROWER'S SIGNATURE PAGE TO SUBORDINATED LOAN AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.
BORROWER:

Telos Corporation


By
/s/ John B. Wood
Name
John B. Wood
Title
Chairman of the Board and Chief Executive Officer


LENDER'S SIGNATURE PAGE TO SUBORDINATED LOAN AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written.
LENDER:

JP Charitable Foundation



/s/ John R.C. Porter
John R.C. Porter, Trustee
 
 
/s/ Brian Padgett
Brian Padgett, Trustee




Exhibit 10.40

THIS SUBORDINATED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN EXEMPTION THEREFROM.
THIS SUBORDINATED PROMISSORY NOTE AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AND INTERCREDITOR AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF MARCH 31, 2015 AMONG JP CHARITABLE FOUNDATION, TELOS CORPORATION, XACTA CORPORATION, UBQUITY.COM, INC. AND TELOWORKS, INC. (COLLECTIVELY, THE "COMPANIES") AND WELLS FARGO CAPITAL FINANCE, LLC ("AGENT"), TO THE INDEBTEDNESS (INCLUDING INTEREST) OWED BY TELOS CORPORATION AND XACTA CORPORATION (AND GUARANTIED BY UBIQUITY.COM, INC. AND TELOWORKS, INC.) PURSUANT TO THAT CERTAIN SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED AS OF MAY 17, 2010 AMONG THE COMPANIES, AGENT AND THE LENDERS FROM TIME TO TIME PARTY THERETO AND THE OTHER SENIOR DEBT DOCUMENTS (AS DEFINED IN THE SUBORDINATION AGREEMENT), AS SUCH   CREDIT AGREEMENT AND OTHER SENIOR DEBT DOCUMENTS HAVE BEEN AND HEREAFTER MAY BE AMENDED, SUPPLEMENTED, RESTATED, AMENDED AND RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME AND TO INDEBTEDNESS REFINANCING THE INDEBTEDNESS UNDER THOSE AGREEMENTS AS CONTEMPLATED BY THE SUBORDINATION AGREEMENT; AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.
MARCH 31, 2015
SUBORDINATED PROMISSORY NOTE
FOR VALUE RECEIVED Telos Corporation,(the " Borrower "), promises to pay to the JP Charitable Foundation Switzerland , with an address of Chemin d'Amon 2, Chalet Ty'Fano, 1936 Verbier, Switzerland   (the " Lender "), the principal sum of up to Five Million Dollars ($5,000,000) in aggregate (less any amount Borrower has borrowed from the Porter Foundation Switzerland), or such lesser amount as may be outstanding under the Loan (defined in the Loan Agreement (defined herein)) pursuant to the terms and conditions of the Loan Agreement (such amount, the " Principal Sum "), together with interest thereon at the rate or rates hereinafter provided, in accordance with the terms set forth herein.
Capitalized terms not otherwise defined herein (including terms set forth in the header hereto) shall have the meanings set forth in the Loan Agreement.
Commencing as of the date of the funding of the loan proceeds by Lender to Borrower (or, in the event of multiple instances of funding, the date of each such funding as to the particular amount funded) and continuing until repayment in full of all sums due hereunder, the unpaid Principal Sum shall bear interest at the fixed rate of twelve percent (12%) per annum payable in arrears in cash on the 20th day of each May, August, November and February (each, an " Interest Payment Date ").  The first Interest Payment Date shall be August 20, 2015.
All interest payable under the terms of this Subordinated Promissory Note (this " Note ") shall be calculated on the basis of a 365-day year and the actual number of days elapsed.
Unless sooner paid, the unpaid Principal Sum, together with interest accrued and unpaid thereon, shall be due and payable in full on July 1, 2017.
All payments on account of this Note shall be paid in lawful money of the United States of America in immediately available funds at such places as the Lender may from time to time designate in writing to the Borrower.
The Borrower may prepay the Principal Sum in whole or in part at any time without premium or penalty.
This Note is the "Note" or "Promissory Note" or "Subordinated Promissory Note" described in that certain Loan Agreement of even date herewith by and among the Borrower and the Lender (as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the " Loan Agreement ").  The Borrower agrees that the Lender, with respect to this Note, shall have the benefit of the provisions of the Loan Agreement that apply to the Loan Documents, as defined in the Loan Agreement.
Upon the occurrence of any Event of Default, at the option of the Lender, all amounts payable by the Borrower to the Lender under the terms of this Note shall immediately become due and payable by the Borrower to the Lender upon written demand from Lender to Borrower, and the Lender shall have all of the rights, powers, and remedies available under the terms of this Note, the Loan Agreement and all applicable Laws, subject to the provisions of the Subordination Agreement.
The Borrower shall not make or be required to make any payments in respect of this Note that are prohibited under the Subordination Agreement and shall not be deemed to be in breach of or default under this Note for failing to make a payment to Lender that is prohibited to be made under the Subordination Agreement.
THE BORROWER AND LENDER ACKNOWLEDGE AND AGREE THAT THIS NOTE SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
THE PARTIES HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF FAIRFAX OR LOUDOUN, COMMONWEALTH OF VIRGINIA AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE LITIGATED IN SUCH COURTS.  EACH PARTY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.  EACH PARTY HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO EITHER PARTY AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS NOTE AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.
THE BORROWER AND THE LENDER, BY THEIR ACCEPTANCE HEREOF, HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH THE BORROWER AND THE LENDER MAY BE PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO THIS NOTE AND/OR ANY OF THE OTHER LOAN DOCUMENTS (INCLUDING THE LOAN AGREEMENT).  IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER OF THE IMPORTANT RIGHT OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE.  THIS WAIVER IS KNOWINGLY, WILLINGLY, AND VOLUNTARILY MADE BY THE BORROWER AND THE LENDER, AND EACH HEREBY REPRESENTS TO THE OTHER THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  EACH OF THE BORROWER AND THE LENDER HEREBY FURTHER REPRESENT TO THE OTHER THAT IT HAS HAD THE OPPORTUNITY TO BE REPRESENTED AND ADVISED BY LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, IN THE SIGNING OR ACCEPTANCE OF THIS NOTE AND IN THE MAKING OF THIS WAIVER, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
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SIGNATURE PAGE TO SUBORDINATED PROMISSORY NOTE
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly authorized representative as of the date first written above.
BORROWER:


TELOS CORPORATION


By
/s/ John B. Wood
Name
John B. Wood
Title
Chairman of the Board and Chief Executive Officer

Exhibit 10.41

SUBORDINATION AND INTERCREDITOR AGREEMENT

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this " Agreement ") is entered into as of this March 31, 2015, by Porter Foundation Switzerland (" Subordinated Creditor "), Telos Corporation, a Maryland corporation (" Telos "), Xacta Corporation, a Delaware corporation (" Xacta "), Ubiquity.com, Inc., a Delaware corporation (" Ubiquity "), and Teloworks, Inc., a Delaware corporation (" Teloworks "; Telos, Xacta, Ubiquity, and Teloworks are collectively, the " Companies " and individually a " Company "), and Wells Fargo Capital Finance, LLC, a Delaware limited liability company, as Agent for all Senior Lenders party to the Senior Credit Agreement described below and all Bank Product Providers.
R E C I T A L S
A. The Companies, Agent and Senior Lenders have entered into a Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 (as the same has been and may be amended, supplemented, restated, amended and restated or otherwise modified from time to time, the " Senior Credit Agreement ") pursuant to which, among other things, Senior Lenders have agreed, subject to the terms and conditions set forth in the Senior Credit Agreement, to make certain loans and financial accommodations to the Telos and Xacta, and all such loans and financial accommodations are guarantied by Ubiquity and Teloworks.  All of the obligations of Telos and Xacta to Agent and Senior Lenders under the Senior Credit Agreement and the other Senior Debt Documents are joint and several and the guaranties thereof by Ubiquity and Teloworks are joint and several, and all of such obligations and guaranties are secured by liens on and security interests in the Collateral (as hereinafter defined).
B. The Companies and their subsidiaries (and Telos Identity Management Solutions, LLC, whether or not constituting a Subsidiary) may from time to time obtain Bank Products (as hereinafter defined) and become liable for the Bank Product Obligations (as hereinafter defined) secured by liens and security interests in the Collateral.
C. Telos and the Subordinated Creditor have entered into a Subordinated Loan Agreement of even date herewith (as the same may be amended, supplemented or otherwise modified from time to time as permitted hereunder, the " Subordinated Loan Agreement ") pursuant to which the Subordinated Creditor is extending credit to Telos in an amount equal to $2,500,000 (and may, on or prior to May 15, 2015 further extend credit to Telos by an additional amount of up to $2,500,000, less any amount borrowed by Telos under the Other Subordinated Loan Documents (as defined below)), such that the total aggregate principal amount of credit extended to Telos by the Subordinated Creditor and the Other Subordinated Creditor (as defined below) of the Other Subordinated Loan Documents would not exceed $5,000,000) as evidenced by a Subordinated Promissory Note of even date herewith in the face principal amount of up to $5,000,000 (as the same may be amended, supplemented or otherwise modified from time to time as permitted hereunder, the " Subordinated Note ").  The Other Subordinated Loan Documents refer to the Subordinated Loan Agreement and Subordinated Promissory Note of even date herewith between Telos and the JP Charitable Foundation (the " Other Subordinated Creditor ").  The obligations of Telos to the Subordinated Creditor are not secured by the Collateral (or otherwise) and are not guarantied by any other Person.
D. As an inducement to and as one of the conditions precedent to the agreement of Agent and Senior Lenders to consent to the incurrence by Telos of obligations under the Subordinated Loan Agreement and the Subordinated Note (which would otherwise be prohibited by the terms of the Senior Credit Agreement), Agent and Senior Lenders have required the execution and delivery of this Agreement by Subordinated Creditor and the Companies in order to set forth the relative rights and priorities of Agent, Senior Lenders and the Subordinated Creditor under the Senior Debt Documents and the Subordinated Debt Documents.
NOW, THEREFORE, in order to induce Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:
1.              Definitions .  The following terms shall have the following meanings in this Agreement:
" Affiliate " means , as applied to any Person, any other Person who controls, is controlled by, or is under common control with, such Person.  For purposes of this definition, "control" means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of equity interests, by contract, or otherwise; provided , however , that (a) any Person which owns directly or indirectly 10% or more of the equity interests having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, and (b) each partnership in which a Person is a general partner shall be deemed an Affiliate of such Person.
" Agent " shall mean Wells Fargo Capital Finance, LLC, as Agent for the Senior Lenders and the Bank Product Providers, or any other Person appointed by the holders of the Senior Debt as administrative agent for purposes of the Senior Debt Documents and this Agreement.
" Bank Product " shall mean any financial accommodation extended to a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) by a Bank Product Provider including:  (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging exposure to fluctuations in interest or exchange rates, loan, credit exchange, security, or currency valuations or commodity prices.
" Bank Product Documents " shall mean those agreements entered into from time to time by a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) with a Bank Product Provider in connection with the obtaining of any of the Bank Products.
" Bank Product Obligations " shall mean all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) to any Bank Product Provider pursuant to or evidenced by the Bank Product Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Company or any of its subsidiaries are obligated to reimburse to Agent or any Senior Lender as a result of Agent or such Senior Lender purchasing participations from, or executing indemnities or reimbursement obligations to, a Bank Product Provider with respect to the Bank Products provided by such Bank Product Provider to a Company or any of its subsidiaries.
" Bank Product Provider " shall mean Wells Fargo Bank, National Association or any of its Affiliates (and, to the extent the Senior Debt Documents are amended, restated, refinanced, replaced or otherwise modified from time to time to provide that Bank Product Obligations provided by another Person shall be secured by the Collateral thereunder, shall include any such other Person).
" Bankruptcy Code " shall mean Chapter 11 of Title 11 of the United States Code, as amended from time to time and any successor statute and all rules and regulations promulgated thereunder.
" Collateral " shall mean all of the existing or hereafter acquired property, whether real, personal or mixed, of each Company.
" Disposition " shall mean, with respect to any interest in property, the sale, lease, license or other disposition of such interest in such property.
" Distribution " shall mean, with respect to any indebtedness or obligation, (a) any payment or distribution by any Person of cash, securities or other property, by set-off or otherwise, on account of such indebtedness or obligation, or (b) any redemption, purchase or other acquisition of such indebtedness or obligation by any Person.
" Enforcement Action " shall mean (a) to take from or for the account of any Company or any guarantor of the Subordinated Debt, by set-off or in any other manner, the whole or any part of any moneys which may now or hereafter be owing by any Company or any such guarantor with respect to the Subordinated Debt, (b) to initiate or participate with others in any suit, action or proceeding against any Company or any such guarantor to (i) to sue for or enforce payment of the whole or any part of the Subordinated Debt, (ii) commence or join with other Persons to commence a Proceeding with respect to any Company or any guarantor, or (iii) commence judicial enforcement of any of the rights and remedies under the Subordinated Debt Documents or applicable law with respect to the Subordinated Debt, (c) to accelerate the Subordinated Debt, (d) to take any action to enforce any rights or remedies with respect to the Subordinated Debt, (e) to exercise any put option or to cause any Company or any such guarantor to honor any redemption or mandatory prepayment obligation under any Subordinated Debt Document or (f) to exercise any rights or remedies of a secured party under the Subordinated Debt Documents or applicable law or take any action under the provisions of any state or federal law, including, without limitation, the Uniform Commercial Code, or under any contract or agreement, to enforce, foreclose upon, take possession of or sell any property or assets of any Company or any such guarantor.
 " Paid in Full ," " Payment in Full ," " paid in full " or " payment in full " shall mean, as of any date of determination with respect to the Senior Debt, that:  (a) all of such Senior Debt (other than (i) contingent indemnification obligations not yet due and payable or with respect to which a claim has not been asserted, (ii) obligations not yet due and payable with respect to letters of credit issued pursuant to the Senior Debt Documents (it being understood that such obligations include interest, fees, charges, costs and expenses that accrue subsequent to such date of determination in respect of undrawn or drawn letters of credit) and (iii) Bank Product Obligations not yet due and payable) has been paid in full in cash, (b) no Person has any further right to obtain any loans, letters of credit or other extensions of credit under the Senior Debt Documents, (c) any and all letters of credit issued under the Senior Debt Documents have been cancelled and returned (or backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount equal to 105% of the face amount of such letters of credit in accordance with the terms of such documents), (d) any and all Bank Product Obligations have been cancelled (or backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount reasonably determined by Agent as sufficient to satisfy the estimated credit exposure with respect to the Bank Product Obligations), and (e) any costs, expenses and contingent indemnification obligations which are not yet due and payable but with respect to which a claim has been or may reasonably be expected to be asserted by Agent or a Senior Lender, are backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount reasonably estimated by Agent to be the amount of costs, expenses and contingent indemnification obligations that may become due and payable.
" Permitted Refinancing " shall mean any refinancing or replacement of the Senior Debt under the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents).
" Permitted Refinancing Senior Debt Documents " shall mean any financing documentation which replaces the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents) and pursuant to which the Senior Debt under the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents) is refinanced or replaced, whether by the same or any other agent, lender or group of lenders, as such financing documentation may be amended, supplemented or otherwise modified from time to time in compliance with this Agreement.
" Permitted Subordinated Debt Payments " shall mean payments of regularly scheduled payments of interest on the Subordinated Debt due and payable on a non-accelerated basis in accordance with the terms of the Subordinated Debt Documents as in effect on the date hereof or as modified in accordance with the terms of this Agreement.
" Person " shall mean any natural person, corporation, general or limited partnership, limited liability company, firm, trust, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.
" Proceeding " shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person.
" Senior Debt " shall mean (a) all obligations, liabilities and indebtedness of every nature of the Companies from time to time owed to Agent or any Senior Lender under the Senior Debt Documents, including, without limitation, the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together with any interest, fees, costs and expenses accruing thereon after the commencement of a Proceeding, without regard to whether or not such interest, fees, costs and expenses are allowed, and (b) all Bank Product Obligations.  Senior Debt shall be considered to be outstanding whenever any loan commitment under any Senior Debt Document is outstanding.
" Senior Debt Documents " shall mean the WFCF Loan Documents and, after the consummation of any Permitted Refinancing, the Permitted Refinancing Senior Debt Documents.
" Senior Default " shall mean any "Default" or "Event of Default" under the Senior Debt Documents.
" Senior Lenders " shall mean the holders of the Senior Debt.
" Senior Secured Parties " shall mean Agent, Senior Lenders and Bank Product Providers.
" Subordinated Debt " shall mean all of the obligations of the Companies to Subordinated Creditor evidenced by or incurred pursuant to the Subordinated Debt Documents.
" Subordinated Debt Documents " shall mean the Subordinated Note, the Subordinated Loan Agreement, any guaranty with respect to the Subordinated Debt (notwithstanding that the Subordinated Debt is not permitted to be guarantied), and all other documents, agreements and instruments now existing or hereinafter entered into in connection with the Subordinated Loan Agreement.
" WFCF Loan Documents " shall mean the Senior Credit Agreement and all other agreements, documents and instruments executed from time to time in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time.
2.              Subordination .
2.1.              Subordination of Subordinated Debt to Senior Debt .  Each Company covenants and agrees, and Subordinated Creditor by its acceptance of the Subordinated Debt Documents (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, notwithstanding anything to the contrary contained in any of the Subordinated Debt Documents, that the payment of any and all of the Subordinated Debt shall be subordinate and subject in right and time of payment, to the extent and in the manner hereinafter set forth, to the prior payment in full of the Senior Debt.  Each holder of Senior Debt, whether now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement.
 
2.2.              Liquidation, Dissolution, Bankruptcy .  In the event of any Proceeding involving any Company:
(a)
All Senior Debt shall first be paid in full before any Distribution, whether in cash, securities or other property, shall be made to Subordinated Creditor on account of any Subordinated Debt.
(b)
Any Distribution, whether in cash, securities or other property which would otherwise, but for the terms hereof, be payable or deliverable in respect of the Subordinated Debt shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Senior Debt Documents) until all Senior Debt is paid in full.  The Subordinated Creditor irrevocably authorizes, empowers and directs any debtor, debtor in possession, receiver, trustee, liquidator, custodian, conservator or other Person having authority, to pay or otherwise deliver all such Distributions to Agent.  The Subordinated Creditor also irrevocably authorizes and empowers Agent, in the name of the Subordinated Creditor, to demand, sue for, collect and receive any and all such Distributions.
(c)
The Subordinated Creditor agrees to execute, verify, deliver and file any proofs of claim in respect of the Subordinated Debt requested by Agent in connection with any such Proceeding and hereby irrevocably authorizes, empowers and appoints Agent its agent and attorney-in-fact to (i) execute, verify, deliver and file such proofs of claim upon the failure of the Subordinated Creditor promptly to do so prior to 30 days before the expiration of the time to file any such proof of claim and (ii) vote such claim in any such Proceeding upon the failure of the Subordinated Creditor to do so prior to 15 days before the expiration of the time to vote any such claim; provided, Agent shall have no obligation to execute, verify, deliver, file and/or vote any such proof of claim.  In the event that Agent votes any claim in accordance with the authority granted hereby, the Subordinated Creditor shall not be entitled to change or withdraw such vote.
(d)
The Subordinated Creditor agrees that it will consent to, and not object to or oppose any use of cash collateral consented to by Agent or any financing provided by any Senior Lender to any Company (or any financing provided by any other Person consented to by Agent) (collectively, " DIP Financing ") on such terms and conditions as Agent, in its sole discretion, may decide.  In connection therewith, any Company or any of their subsidiaries may grant to Agent and Senior Lenders or such other lender, as applicable, liens and security interests upon all of the property of any of the Companies or any of their subsidiaries, which liens and security interests (i) shall secure payment of all Senior Debt (whether such Senior Debt arose prior to the commencement of any Proceeding or at any time thereafter) and all other financing provided by any Senior Lender or consented to by Agent during the Proceeding and (ii) shall be superior in priority to any liens and security interests, if any, in favor of the Subordinated Creditor on the property of any of the Companies and their Subsidiaries that the Subordinated Creditor may have notwithstanding the prohibition of such security interests or liens under this Agreement.  If, in connection with any cash collateral use or DIP Financing, any liens and security interests on the Collateral held by Agent are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee "carve out," or fees owed to the United States Trustee, then any liens on the Collateral that the Subordinated Creditor may have notwithstanding the prohibition of such liens under this Agreement shall also be subordinated to such interest or claim and shall remain subordinated to the liens and security interests on the Collateral of Agent consistent with this Agreement.  The Subordinated Creditor agrees that it will consent to, and not object to or oppose, a sale or other disposition of any property securing all of any part of any Senior Debt free and clear of security interests or liens that the Subordinated Creditor may have notwithstanding the prohibition of such security interests or liens under this Agreement, or other claims of the Subordinated Creditor under the Bankruptcy Code, including Sections 363, 365 and 1129 of the Bankruptcy Code, if Agent has consented to such sale or disposition.  The Subordinated Creditor agrees not to assert any right it may have in any Proceeding arising from any Company's use, sale or other disposition of Collateral and agrees that it will not seek (or support any other Person seeking) to have any stay, whether automatic or otherwise, lifted with respect to any Collateral without the prior written consent of Agent.  The Subordinated Creditor agrees that it will not, and will not permit, any of its Affiliates to, directly or indirectly provide, participate in or otherwise support, any financing in a Proceeding to any Company without the prior written consent of Agent.  The Subordinated Creditor will not object to or oppose any adequate protection sought by Agent or any Senior Lender or object to or oppose any motion by Agent to lift the automatic stay or any other stay in any Proceeding.  The Subordinated Creditor will not seek or assert any right it may have for adequate protection (it being understood and agreed that at all times the Subordinated Debt shall be unsecured) of its interest in any Collateral.  The Subordinated Creditor waives any claim it may now or hereafter have arising out of Agent's or Senior Lenders' election, in any Proceeding, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by any Company, as debtor in possession.  The Subordinated Creditor further agrees that it shall not, without Agent's prior written consent, commence or continue any Proceeding, propose any plan of reorganization, arrangement or proposal or file any motion, pleading or material in support of any motion or plan of reorganization, arrangement or proposal that would materially impair the rights of the Senior Lenders, is in conflict with the terms of this Agreement, or is opposed by Senior Lenders or Agent, or oppose any plan of reorganization or liquidation supported by Agent.
(e)
The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights and priorities of Senior Secured Parties and the Subordinated Creditor even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed in connection with any such Proceeding.
2.3.              Subordinated Debt Payment Restrictions .  Notwithstanding the terms of the Subordinated Debt Documents, each Company hereby agrees that it may not make, and the Subordinated Creditor hereby agrees that it will not accept, any Distribution with respect to the Subordinated Debt until the Senior Debt is paid in full other than, subject to the terms of subsection 2.2 of this Agreement, Permitted Subordinated Debt Payments; provided , however , that the Companies and the Subordinated Creditor further agree that no Permitted Subordinated Debt Payment may be made by a Company or accepted by the Subordinated Creditor if, at the time of such payment, either (i) a Senior Default exists, or (ii) Excess Availability (as defined in the Senior Credit Agreement, or, following a Permitted Refinancing, a term of like meaning under the Senior Debt Documents then in effect) shall not equal or exceed $1,500,000 after giving effect to the making of such payment.  The Subordinated Creditor hereby agrees that, notwithstanding any provision of the any Subordinated Debt Documents to the contrary, no default or event of default shall be deemed to exist under any Subordinated Debt Document as a result of any Distribution that is otherwise required under any Subordinated Debt Document not being made to the extent that such Distribution with respect to the Subordinated Debt is not permitted to be made pursuant to this Agreement.
 
2.4.              Subordinated Debt Standstill Provisions .  Until the Senior Debt is paid in full, the Subordinated Creditor shall not, without the prior written consent of Agent, take any Enforcement Action with respect to the Subordinated Debt or under the Subordinated Debt Documents.  Any Distributions or other proceeds of any Enforcement Action obtained by the Subordinated Creditor shall in any event be held in trust by it for the benefit of Agent and Senior Lenders and promptly paid or delivered to Agent for the benefit of Senior Lenders in the form received until the Senior Debt is paid in full.
 
2.5.              Incorrect Payments .  If any Distribution on account of the Subordinated Debt not permitted to be made by a Company or accepted by the Subordinated Creditor under this Agreement is received by the Subordinated Creditor, such Distribution shall not be commingled with any of the assets of the Subordinated Creditor, shall be held in trust by the Subordinated Creditor for the benefit of Senior Secured Parties and shall be promptly paid over to Agent for application (in accordance with the Senior Debt Documents ) to the payment of the Senior Debt then remaining unpaid, until all of the Senior Debt is paid in full.
 
2.6.              No Collateral / Guaranties for Subordinated Debt; Subordination of Liens and Security Interests; Agreement Not to Contest; Agreement to Release Liens .  Until all of the Senior Debt has been paid in full, none of the Subordinated Debt shall be permitted to be secured (including, without limitation, by any liens or security interests in any of the Collateral) by any assets, or guarantied by any Person.  In the event that, notwithstanding the foregoing, the Subordinated Debt is secured at any time, then any liens and security interests of the Subordinated Creditor in the Collateral or any other assets of the Companies which may exist at any time (a) shall be and hereby are subordinated for all purposes and in all respects to the liens and security interests of Agent and Senior Secured Parties in the Collateral and such other assets, regardless of the time, manner or order of perfection of any such liens and security interests and regardless of the validity, perfection or enforceability of such liens and security interests of Agent, and (b) shall be immediately released by the Subordinated Creditor upon demand by Agent.  The Subordinated Creditor agrees that it will not at any time contest the validity, perfection, priority or enforceability of the Senior Debt, the Senior Debt Documents, or the liens and security interests of Agent and Senior Secured Parties in the Collateral or any other assets securing the Senior Debt.  In the event that Agent or a Company desires to sell, lease, license or otherwise dispose of any interest in any of the Collateral (including the equity interests of a Company) and Agent consents to such Disposition, the Subordinated Creditor shall be deemed to have consented to such Disposition and such Disposition shall be free and clear of any liens and security interests of the Subordinated Creditor in such Collateral (and if such Disposition involves the equity interests of a Company, the Subordinated Creditor shall release such Company from any guaranty or other obligation owing to the Subordinated Creditor) (it being understood that no Company other than Telos is permitted to be obligated in respect of the Subordinated Debt) and any purchaser of any Collateral may rely on this Agreement as evidence of the Subordinated Creditor's consent to such Disposition and that such Disposition is free and clear of any liens and security interests of the Subordinated Creditor in such Collateral (and if such Disposition involves the equity interests of a Company, that such Company is released from any guaranty or other obligation owing to the Subordinated Creditor) (it being understood that no Company other than Telos is permitted to be obligated in respect of the Subordinated Debt).  The Subordinated Creditor shall (or shall cause its agent) to promptly execute and deliver to Agent such termination statements and releases as Agent shall request to effect the release of the liens and security interests of the Subordinated Creditor in such Collateral in accordance with this subsection 2.6 .  In furtherance of the foregoing, the Subordinated Creditor hereby irrevocably appoints Agent its attorney-in-fact, with full authority in the place and stead of the Subordinated Creditor and in the name of the Subordinated Creditor or otherwise, to execute and deliver any document or instrument which the Subordinated Creditor may be required to deliver pursuant to this subsection 2.6 .
 
2.7.              Sale, Transfer or other Disposition of Subordinated Debt .
(a)
The Subordinated Creditor shall not sell, assign, pledge, dispose of or otherwise transfer all or any portion of the Subordinated Debt or any Subordinated Debt Document:   (i) without   giving prior written notice of such action to Agent and obtaining the prior written consent of Agent to such transfer, and (ii) unless, prior to the consummation of any such action, the transferee thereof shall execute and deliver to Agent an agreement joining such transferee as a party to this Agreement as the Subordinated Creditor or an agreement substantially identical to this Agreement, providing for the continued subordination of the Subordinated Debt to the Senior Debt as provided herein and for the continued effectiveness of all of the rights of Agent and Senior Lenders arising under this Agreement.
(b)
Notwithstanding the failure of any transferee to execute or deliver an agreement joining such transferee as a party to this Agreement as the Subordinated Creditor or an agreement substantially identical to this Agreement, the subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Subordinated Debt, and the terms of this Agreement shall be binding upon the successors and assigns of the Subordinated Creditor, as provided in Section 9 hereof.
2.8.              Legends .  Until the termination of this Agreement in accordance with Section 15 hereof, the Subordinated Creditor will cause to be clearly, conspicuously and prominently inserted on the face of the Subordinated Note, the Subordinated Loan Agreement and any other Subordinated Debt Document, as well as any renewals or replacements thereof, the following legend:
"This [ agreement/instrument ] and the rights and obligations evidenced hereby are subordinate in the manner and to the extent set forth in that certain Subordination and Intercreditor Agreement (the "Subordination Agreement") dated as of March __, 2015 among Porter Foundation Switzerland, Telos Corporation, Xacta Corporation, Ubquity.com, Inc. and Teloworks, Inc. (collectively, the "Companies") and Wells Fargo Capital Finance, LLC ("Agent"), to the indebtedness (including interest) owed by Telos Corporation and Xacta Corporation (and guarantied by Ubiquity.com, Inc. and Teloworks, Inc.) pursuant to that certain Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 among the Companies, Agent and the lenders from time to time party thereto and the other Senior Debt Documents (as defined in the Subordination Agreement), as such   Credit Agreement and other Senior Debt Documents have been and hereafter may be amended, supplemented, restated, amended and restated or otherwise modified from time to time and to indebtedness refinancing the indebtedness under those agreements as contemplated by the Subordination Agreement; and each holder of this instrument, by its acceptance hereof, irrevocably agrees to be bound by the provisions of the Subordination Agreement."
2.9.              Obligations Hereunder Not Affected .  All rights and interest of Senior Secured Parties hereunder, and all agreements and obligations of the Subordinated Creditor and Companies hereunder, shall remain in full force and effect irrespective of:
(a)
any lack of validity or enforceability of any document evidencing any of the Senior Debt;
(b)
any change in the time, manner or place of payment of, or any other term of, all or any of the Senior Debt, or any other permitted amendment or waiver of or any release or consent to departure from any of the Senior Debt Documents;
(c)
any exchange, subordination, release or non-perfection of any collateral for all or any of the Senior Debt;
(d)
any failure of any Senior Secured Party to assert any claim or to enforce any right or remedy against any other party hereto under the provisions of this Agreement or any Senior Debt Document other than this Agreement;
(e)
any reduction, limitation, impairment or termination of the Senior Debt for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and Companies and the Subordinated Creditor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of invalidity, illegality, nongenuiness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Senior Debt; and
(f)
any other circumstance which might otherwise constitute a defense available to, or a discharge of, Companies in respect of the Senior Debt or the Subordinated Creditor in respect of this Agreement.
The Subordinated Creditor acknowledges and agrees that Senior Secured Parties may in accordance with the terms of the Senior Debt Documents, without notice or demand and without affecting or impairing the Subordinated Creditor's obligations hereunder, (i) amend, restate, amended and restate, supplement or otherwise modify the Senior Debt Documents in any manner whatsoever; (ii) take or hold security for the payment of the Senior Debt and exchange, enforce, foreclose upon, waive and release any such security; (iii) apply such security and direct the order or manner of sale thereof as Agent and Senior Lenders in their sole discretion, may determine; (iv) release and substitute one or more endorsers, warrantors, borrowers or other obligors; and (v) exercise or refrain from exercising any rights against any Company or any other Person.  The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights of Senior Secured Parties and the Subordinated Creditor even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed.
2.10.              Marshaling .  The Subordinated Creditor hereby waives any rights it may have under applicable law to assert the doctrine of marshaling or to otherwise require any Senior Secured Party to marshal any property of any Company or of any guarantor or other obligor of the Senior Debt for the benefit of the Subordinated Creditor.
 
2.11.              Application of Proceeds from Sale or other Disposition of the Collateral .  In the event of any Disposition (including a casualty loss or taking through eminent domain) of the Collateral, the proceeds resulting therefrom (including insurance proceeds) shall be applied to the Senior Debt in the order and manner set forth in the Senior Debt Documents until such time as the Senior Debt is Paid in Full.
 
2.12.              Rights Relating to Agent's Actions with respect to the Collateral .  The Subordinated Creditor hereby waives, to the extent permitted by applicable law, any rights which it may have to enjoin or otherwise obtain a judicial or administrative order preventing Senior Secured Parties from taking, or refraining from taking, any action with respect to all or any part of the Collateral.  Without limitation of the foregoing, the Subordinated Creditor hereby agrees (a) that it has no right to direct or object to the manner in which a Senior Secured Party applies the proceeds of the Collateral resulting from the exercise by Senior Secured Parties of rights and remedies under the Senior Debt Documents to the Senior Debt, (b) that it waives any right to object to any action or inaction by any Senior Secured Party with respect to exercising its rights or remedies under the Senior Debt Documents or with respect to the Collateral (including in connection with any foreclosure or enforcement of liens in respect of Collateral), and (c) no Senior Secured Party has assumed any obligation to act as the agent for the Subordinated Creditor with respect to the Collateral.  The Subordinated Creditor shall not object to any proposed retention or acceptance of Collateral by a Senior Secured Party in full or partial satisfaction of such Senior Secured Party's Senior Debt and agrees that any such retention or acceptance by a Senior Secured Party shall be free and clear of any security interests and liens of the Subordinated Creditor (it being understood that the Subordinated Creditor shall not be permitted to have any liens or security interests on any of the Collateral).
 
2.13.              No Forgiveness or Exchange of Subordinated Debt .  The Subordinated Debt shall not be forgiven or otherwise cancelled without the prior written consent of Agent.  The Subordinated Debt shall not be exchanged for or otherwise converted into equity without the prior written consent of Agent.
 
3.              Modifications .
 
3.1.              Modifications to Senior Debt Documents .  Senior Lenders may at any time and from time to time without the consent of or notice to the Subordinated Creditor, without incurring liability to the Subordinated Creditor and without impairing or releasing the obligations of the Subordinated Creditor under this Agreement, change the manner or place of payment, increase or reduce the amount of, or extend the time of payment of or renew or alter any of the terms of the Senior Debt, or amend, supplement, restate, amend and restate or otherwise modify in any manner any agreement, note, guaranty or other instrument evidencing or securing or otherwise relating to the Senior Debt.
 
3.2.              Modifications to Subordinated Debt Documents .  Until the Senior Debt has been paid in full, and notwithstanding anything to the contrary contained in the Subordinated Debt Documents, the Subordinated Creditor shall not, without the prior written consent of Agent, amend, modify or supplement the Subordinated Debt Documents.
 
4.              Representations and Warranties .
 
4.1.              Representations and Warranties of Subordinated Creditor .  The Subordinated Creditor hereby represents and warrants to Agent and Senior Lenders that as of the date hereof (and as of all times with respect to clause (f) below):  (a) the Subordinated Creditor is a charitable foundation, duly formed and validly existing under the laws of the country of Switzerland; (b) the Subordinated Creditor has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by the Subordinated Creditor will not violate or conflict with the foundational, organizational or other governing documents of the Subordinated Creditor, any material agreement binding upon the Subordinated Creditor or any law, regulation or order or require any consent or approval which has not been obtained; (d) this Agreement is the legal, valid and binding obligation of the Subordinated Creditor, enforceable against the Subordinated Creditor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles; and (e) the Subordinated Creditor is the sole owner, beneficially and of record, of the Subordinated Debt Documents and the Subordinated Debt; and (f) the Subordinated Debt is (i) not secured any liens or any security interests in the Collateral or any other assets of any Company or any other Person, and (ii) is solely on obligation of Telos and is not guarantied by any Person.
 
4.2.              Representations and Warranties of Agent .  Agent hereby represents and warrants to the Subordinated Creditor that as of the date hereof:  (a) Agent is a Delaware limited liability company; (b) Agent has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by Agent will not violate or conflict with the organizational documents of Agent, any material agreement binding upon Agent or any law, regulation or order or require any consent or approval which has not been obtained; and (d) this Agreement is the legal, valid and binding obligation of Agent, enforceable against Agent in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles.
 
5.              Subrogation; Recovery .  The Subordinated Creditor will not exercise (i) any right of subrogation that it may now or hereafter have or obtain in respect of the rights of Agent or any other Senior Secured Party against any Company, any guarantor of any of the Senior Debt or any of the Collateral or (ii) any right to participate in any claim or remedy of Agent and any other Senior Secured Party against any Company, any guarantor of any of the Senior Debt or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, in each case until all of the Senior Debt has been Paid in Full.  If Agent or any Senior Lender is required to disgorge any proceeds of Collateral, payment or other amount received by such Person (whether because such proceeds, payment or other amount is invalidated, declared to be fraudulent or preferential or otherwise) or turn over or otherwise pay any amount (a " Recovery ") to the estate or to any creditor or representative of a Company or any other Person, then the Senior Debt shall be reinstated (to the extent of such Recovery) as if such Senior Debt had never been paid and to the extent the Subordinated Creditor has received proceeds, payments or other amounts to which the Subordinated Creditor would not have been entitled under this Agreement had such reinstatement occurred prior to receipt of such proceeds, payments or other amounts, the Subordinated Creditor shall turn over such proceeds, payments or other amounts to Agent for reapplication to the Senior Debt.  A Distribution made pursuant to this Agreement to Agent or Senior Lenders which otherwise would have been made to the Subordinated Creditor is not, as between the Companies and the Subordinated Creditor, a payment by the Companies to or on account of the Senior Debt.
 
6.              Modification .  Any modification or waiver of any provision of this Agreement, or any consent to any departure by any party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by Agent and the Subordinated Creditor, and then such modification, waiver or consent shall be effective only in the specific instance and for the specific purpose given.  Any notice to or demand on any party hereto in any event not specifically required hereunder shall not entitle the party receiving such notice or demand to any other or further notice or demand in the same, similar or other circumstances unless specifically required hereunder.
 
7.              Further Assurances .  Each party to this Agreement promptly will execute and deliver such further instruments and agreements and do such further acts and things as may be reasonably requested in writing by any other party hereto that may be necessary or desirable in order to effect fully the purposes of this Agreement.
 
8.              Notices .  Unless otherwise specifically provided herein, any notice delivered under this Agreement shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or certified or registered United States mail and shall be deemed to have been given (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a business day before 4:00 p.m. (Chicago time) or, if not, on the next succeeding business day; (c) if delivered by overnight courier, one business day after delivery to such courier properly addressed; or (d) if by United States mail, four business days after deposit in the United States mail, postage prepaid and properly addressed.
Notices shall be addressed as follows:
If to Subordinated Creditor:


Porter Foundation Switzerland
Chemin d'Amon 2
Chalet Ty'Fano
1936 Verbier
Switzerland
Attention:  John R. C. Porter
Telecopy:  +41 22 908 11 91
Email:  jrcporter@gmail.com
With a copy to:


Silex Trust Company Ltd.
6 Rue Kleberg
1201 Geneva
Switzerland
Telecopy:  +41 22 908 11 91
Email:  brian@silextrust.com
If to a Company:


c/o TELOS CORPORATION
19886 Ashburn Road
Ashburn, Virginia  20147
Attn:  General Counsel
Fax No. (703) 724-1468
If to Agent or Senior Lenders:


WELLS FARGO CAPITAL FINANCE, LLC
One Boston Place, 18th Floor
Boston, Massachusetts  02108
Attn:  Technology Finance Division Manager
Fax No. (617) 523-1697
With a copy to:


Goldberg Kohn Ltd.
55 East Monroe Street, Suite 3300
Chicago, Illinois  60603
Attention: Gary Zussman, Esq.
Telecopy: (312) 863-7440
or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 8 .
9.              Successors and Assigns; Permitted Refinancing .  This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and assigns of Agent, Senior Lenders, the Subordinated Creditor and the Companies.  Senior Lenders may, from time to time, without notice to the Subordinated Creditor, assign or transfer any or all of the Senior Debt or any interest therein to any Person and, notwithstanding any such assignment or transfer, or any subsequent assignment or transfer, the Senior Debt shall, subject to the terms hereof, be and remain Senior Debt for purposes of this Agreement, and every permitted assignee or transferee of any of the Senior Debt or of any interest therein shall, to the extent of the interest of such permitted assignee or transferee in the Senior Debt, be entitled to rely upon and be the third party beneficiary of the subordination provided under this Agreement and shall be entitled to enforce the terms and provisions hereof to the same extent as if such assignee or transferee were initially a party hereto.  The Subordinated Creditor agrees that any party that consummates a Permitted Refinancing may rely on and enforce this Agreement.  The Subordinated Creditor further agrees that it will, at the request of Agent, enter into an agreement, in the form of this Agreement, mutatis   mutandis , with the party that consummates the Permitted Refinancing; provided, that the failure of the Subordinated Creditor to execute such an agreement shall not affect such party's right to rely on and enforce the terms of this Agreement.
 
10.              Relative Rights .  This Agreement shall define the relative rights of Senior Secured Parties and the Subordinated Creditor.  Nothing in this Agreement shall (a) impair, as among the Companies and Senior Secured Parties and as between the Companies and the Subordinated Creditor, the obligation of the Companies with respect to the payment of the Senior Debt and the Subordinated Debt in accordance with their respective terms or (b) affect the relative rights of Senior Secured Parties or the Subordinated Creditor with respect to any other creditors of any Company.
 
11.              Conflict .  In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Subordinated Debt Documents, the provisions of this Agreement shall control and govern.
 
12.              Headings .  The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof.
 
13.              Counterparts .  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.    Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement.
 
14.              Severability .  In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement.
 
15.              Continuation of Subordination; Termination of Agreement .  This Agreement shall be applicable both before and after the commencement of any Proceeding and all converted or succeeding cases in respect thereof.  Accordingly, the provisions of this Agreement are intended to be and shall be enforceable as a subordination agreement within the meaning of Section 510 of the Bankruptcy Code.  This Agreement shall remain in full force and effect until the payment in full of the Senior Debt after which this Agreement shall terminate without further action on the part of the parties hereto; provided , that if any payment is, subsequent to such termination, recovered from any holder of Senior Debt, this Agreement shall be reinstated; provided , further that a Permitted Refinancing shall not be deemed to be payment in full of the Senior Debt.
 
16.              APPLICABLE LAW .  THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
 
17.              CONSENT TO JURISDICTION .  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS.  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE SUBORDINATED CREDITOR AND EACH COMPANY AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE SAME HAS BEEN POSTED.
 
18.              WAIVER OF JURY TRIAL .  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE SUBORDINATED DEBT DOCUMENTS OR ANY OF THE SENIOR DEBT DOCUMENTS.  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE SENIOR DEBT DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT WARRANTS AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.
 
19.              Additional Companies .  Telos shall cause any Person that becomes a direct or indirect subsidiary of Telos to execute a joinder (in form and substance satisfactory to Agent) to this Agreement to bind such Person to this Agreement as a Company (and the Subordinated Creditor agrees and acknowledge that upon execution of such a joinder such Person shall automatically constitute a "Company" for purposes of this Agreement without any need for consent or acknowledgment by the Subordinated Creditor).
 
20.              Prevailing Parties .  In the event it becomes necessary for any Senior Secured Party or the Subordinated Creditor to commence or become a party to any proceeding or action to enforce the provisions of this Agreement, the court or body before which the same shall be tried shall award to the prevailing party all costs and expenses thereof, including reasonable attorneys' fees, the usual and customary and lawfully recoverable court costs, and all other expenses in connection therewith.


IN WITNESS WHEREOF, Subordinated Creditor, the Companies and Agent have caused this Agreement to be executed as of the date first above written.

SUBORDINATED CREDITOR :
 
PORTER FOUNDATION SWITZERLAND
 
 
/s/ John R.C. Porter
John R.C. Porter, Trustee
 
 
/s/ Brian Padgett
Brian Padgett, Trustee
 
 
COMPANIES:
 
     
TELOS CORPORATION
 
A Maryland corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
     
XACTA CORPORATION
 
A Delaware corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
UBIQUITY.COM, INC.
 
A Delaware corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
     
TELOWORKS, INC.
 
A Delaware corporation
 
     
By
/s/ David S. Easley
 
Title
President
 



AGENT:
 
WELLS FARGO CAPITAL FINANCE, LLC., as Agent
 
By
/s/ Jordan E. Hilliard
Name
Jordan E. Hilliard
Title
Vice President

Exhibit 10.42

SUBORDINATION AND INTERCREDITOR AGREEMENT

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this " Agreement ") is entered into as of this March 31, 2015, by JP Charitable Foundation (" Subordinated Creditor "), Telos Corporation, a Maryland corporation (" Telos "), Xacta Corporation, a Delaware corporation (" Xacta "), Ubiquity.com, Inc., a Delaware corporation (" Ubiquity "), and Teloworks, Inc., a Delaware corporation (" Teloworks "; Telos, Xacta, Ubiquity, and Teloworks are collectively, the " Companies " and individually a " Company "), and Wells Fargo Capital Finance, LLC, a Delaware limited liability company, as Agent for all Senior Lenders party to the Senior Credit Agreement described below and all Bank Product Providers.
R E C I T A L S
A.   The Companies, Agent and Senior Lenders have entered into a Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 (as the same has been and may be amended, supplemented, restated, amended and restated or otherwise modified from time to time, the " Senior Credit Agreement ") pursuant to which, among other things, Senior Lenders have agreed, subject to the terms and conditions set forth in the Senior Credit Agreement, to make certain loans and financial accommodations to the Telos and Xacta, and all such loans and financial accommodations are guarantied by Ubiquity and Teloworks.  All of the obligations of Telos and Xacta to Agent and Senior Lenders under the Senior Credit Agreement and the other Senior Debt Documents are joint and several and the guaranties thereof by Ubiquity and Teloworks are joint and several, and all of such obligations and guaranties are secured by liens on and security interests in the Collateral (as hereinafter defined).
B.   The Companies and their subsidiaries (and Telos Identity Management Solutions, LLC, whether or not constituting a Subsidiary) may from time to time obtain Bank Products (as hereinafter defined) and become liable for the Bank Product Obligations (as hereinafter defined) secured by liens and security interests in the Collateral.
C.   Telos and the Subordinated Creditor have entered into a Subordinated Loan Agreement of even date herewith (as the same may be amended, supplemented or otherwise modified from time to time as permitted hereunder, the " Subordinated Loan Agreement ") pursuant to which the Subordinated Creditor is extending credit to Telos in an amount equal to $2,500,000 (and may, on or prior to May 15, 2015 further extend credit to Telos by an additional amount of up to $2,500,000, less any amount borrowed by Telos under the Other Subordinated Loan Documents (as defined below)), such that the total aggregate principal amount of credit extended to Telos by the Subordinated Creditor and the Other Subordinated Creditor (as defined below) of the Other Subordinated Loan Documents would not exceed $5,000,000) as evidenced by a Subordinated Promissory Note of even date herewith in the face principal amount of up to $5,000,000 (as the same may be amended, supplemented or otherwise modified from time to time as permitted hereunder, the " Subordinated Note ").  The Other Subordinated Loan Documents refer to the Subordinated Loan Agreement and Subordinated Promissory Note of even date herewith between Telos and the Porter Foundation Switzerland (the " Other Subordinated Creditor ").  The obligations of Telos to the Subordinated Creditor are not secured by the Collateral (or otherwise) and are not guarantied by any other Person.
D.   As an inducement to and as one of the conditions precedent to the agreement of Agent and Senior Lenders to consent to the incurrence by Telos of obligations under the Subordinated Loan Agreement and the Subordinated Note (which would otherwise be prohibited by the terms of the Senior Credit Agreement), Agent and Senior Lenders have required the execution and delivery of this Agreement by Subordinated Creditor and the Companies in order to set forth the relative rights and priorities of Agent, Senior Lenders and the Subordinated Creditor under the Senior Debt Documents and the Subordinated Debt Documents.
NOW, THEREFORE, in order to induce Agent and Senior Lenders to consummate the transactions contemplated by the Senior Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:
1.              Definitions .  The following terms shall have the following meanings in this Agreement:
" Affiliate " means , as applied to any Person, any other Person who controls, is controlled by, or is under common control with, such Person.  For purposes of this definition, "control" means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of equity interests, by contract, or otherwise; provided , however , that (a) any Person which owns directly or indirectly 10% or more of the equity interests having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, and (b) each partnership in which a Person is a general partner shall be deemed an Affiliate of such Person.
" Agent " shall mean Wells Fargo Capital Finance, LLC, as Agent for the Senior Lenders and the Bank Product Providers, or any other Person appointed by the holders of the Senior Debt as administrative agent for purposes of the Senior Debt Documents and this Agreement.
" Bank Product " shall mean any financial accommodation extended to a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) by a Bank Product Provider including:  (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging exposure to fluctuations in interest or exchange rates, loan, credit exchange, security, or currency valuations or commodity prices.
" Bank Product Documents " shall mean those agreements entered into from time to time by a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) with a Bank Product Provider in connection with the obtaining of any of the Bank Products.
" Bank Product Obligations " shall mean all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by a Company or any of its subsidiaries (or Telos Identity Management Solutions, LLC, whether or not constituting a subsidiary) to any Bank Product Provider pursuant to or evidenced by the Bank Product Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Company or any of its subsidiaries are obligated to reimburse to Agent or any Senior Lender as a result of Agent or such Senior Lender purchasing participations from, or executing indemnities or reimbursement obligations to, a Bank Product Provider with respect to the Bank Products provided by such Bank Product Provider to a Company or any of its subsidiaries.
" Bank Product Provider " shall mean Wells Fargo Bank, National Association or any of its Affiliates (and, to the extent the Senior Debt Documents are amended, restated, refinanced, replaced or otherwise modified from time to time to provide that Bank Product Obligations provided by another Person shall be secured by the Collateral thereunder, shall include any such other Person).
" Bankruptcy Code " shall mean Chapter 11 of Title 11 of the United States Code, as amended from time to time and any successor statute and all rules and regulations promulgated thereunder.
" Collateral " shall mean all of the existing or hereafter acquired property, whether real, personal or mixed, of each Company.
" Disposition " shall mean, with respect to any interest in property, the sale, lease, license or other disposition of such interest in such property.
" Distribution " shall mean, with respect to any indebtedness or obligation, (a) any payment or distribution by any Person of cash, securities or other property, by set-off or otherwise, on account of such indebtedness or obligation, or (b) any redemption, purchase or other acquisition of such indebtedness or obligation by any Person.
" Enforcement Action " shall mean (a) to take from or for the account of any Company or any guarantor of the Subordinated Debt, by set-off or in any other manner, the whole or any part of any moneys which may now or hereafter be owing by any Company or any such guarantor with respect to the Subordinated Debt, (b) to initiate or participate with others in any suit, action or proceeding against any Company or any such guarantor to (i) to sue for or enforce payment of the whole or any part of the Subordinated Debt, (ii) commence or join with other Persons to commence a Proceeding with respect to any Company or any guarantor, or (iii) commence judicial enforcement of any of the rights and remedies under the Subordinated Debt Documents or applicable law with respect to the Subordinated Debt, (c) to accelerate the Subordinated Debt, (d) to take any action to enforce any rights or remedies with respect to the Subordinated Debt, (e) to exercise any put option or to cause any Company or any such guarantor to honor any redemption or mandatory prepayment obligation under any Subordinated Debt Document or (f) to exercise any rights or remedies of a secured party under the Subordinated Debt Documents or applicable law or take any action under the provisions of any state or federal law, including, without limitation, the Uniform Commercial Code, or under any contract or agreement, to enforce, foreclose upon, take possession of or sell any property or assets of any Company or any such guarantor.
 " Paid in Full ," " Payment in Full ," " paid in full " or " payment in full " shall mean, as of any date of determination with respect to the Senior Debt, that:  (a) all of such Senior Debt (other than (i) contingent indemnification obligations not yet due and payable or with respect to which a claim has not been asserted, (ii) obligations not yet due and payable with respect to letters of credit issued pursuant to the Senior Debt Documents (it being understood that such obligations include interest, fees, charges, costs and expenses that accrue subsequent to such date of determination in respect of undrawn or drawn letters of credit) and (iii) Bank Product Obligations not yet due and payable) has been paid in full in cash, (b) no Person has any further right to obtain any loans, letters of credit or other extensions of credit under the Senior Debt Documents, (c) any and all letters of credit issued under the Senior Debt Documents have been cancelled and returned (or backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount equal to 105% of the face amount of such letters of credit in accordance with the terms of such documents), (d) any and all Bank Product Obligations have been cancelled (or backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount reasonably determined by Agent as sufficient to satisfy the estimated credit exposure with respect to the Bank Product Obligations), and (e) any costs, expenses and contingent indemnification obligations which are not yet due and payable but with respect to which a claim has been or may reasonably be expected to be asserted by Agent or a Senior Lender, are backed by standby letters of credit (issued by a bank, and in form and substance, acceptable to Agent) or cash collateralized, in each case in an amount reasonably estimated by Agent to be the amount of costs, expenses and contingent indemnification obligations that may become due and payable.
" Permitted Refinancing " shall mean any refinancing or replacement of the Senior Debt under the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents).
" Permitted Refinancing Senior Debt Documents " shall mean any financing documentation which replaces the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents) and pursuant to which the Senior Debt under the WFCF Loan Documents (or any Permitted Refinancing Senior Debt Documents) is refinanced or replaced, whether by the same or any other agent, lender or group of lenders, as such financing documentation may be amended, supplemented or otherwise modified from time to time in compliance with this Agreement.
" Permitted Subordinated Debt Payments " shall mean payments of regularly scheduled payments of interest on the Subordinated Debt due and payable on a non-accelerated basis in accordance with the terms of the Subordinated Debt Documents as in effect on the date hereof or as modified in accordance with the terms of this Agreement.
" Person " shall mean any natural person, corporation, general or limited partnership, limited liability company, firm, trust, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.
" Proceeding " shall mean any voluntary or involuntary insolvency, bankruptcy, receivership, custodianship, liquidation, dissolution, reorganization, assignment for the benefit of creditors, appointment of a custodian, receiver, trustee or other officer with similar powers or any other proceeding for the liquidation, dissolution or other winding up of a Person.
" Senior Debt " shall mean (a) all obligations, liabilities and indebtedness of every nature of the Companies from time to time owed to Agent or any Senior Lender under the Senior Debt Documents, including, without limitation, the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and from time to time hereafter owing, due or payable, whether before or after the filing of a Proceeding under the Bankruptcy Code together with any interest, fees, costs and expenses accruing thereon after the commencement of a Proceeding, without regard to whether or not such interest, fees, costs and expenses are allowed, and (b) all Bank Product Obligations.  Senior Debt shall be considered to be outstanding whenever any loan commitment under any Senior Debt Document is outstanding.
" Senior Debt Documents " shall mean the WFCF Loan Documents and, after the consummation of any Permitted Refinancing, the Permitted Refinancing Senior Debt Documents.
" Senior Default " shall mean any "Default" or "Event of Default" under the Senior Debt Documents.
" Senior Lenders " shall mean the holders of the Senior Debt.
" Senior Secured Parties " shall mean Agent, Senior Lenders and Bank Product Providers.
" Subordinated Debt " shall mean all of the obligations of the Companies to Subordinated Creditor evidenced by or incurred pursuant to the Subordinated Debt Documents.
" Subordinated Debt Documents " shall mean the Subordinated Note, the Subordinated Loan Agreement, any guaranty with respect to the Subordinated Debt (notwithstanding that the Subordinated Debt is not permitted to be guarantied), and all other documents, agreements and instruments now existing or hereinafter entered into in connection with the Subordinated Loan Agreement.
" WFCF Loan Documents " shall mean the Senior Credit Agreement and all other agreements, documents and instruments executed from time to time in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time.
2.              Subordination .
2.1.              Subordination of Subordinated Debt to Senior Debt .  Each Company covenants and agrees, and Subordinated Creditor by its acceptance of the Subordinated Debt Documents (whether upon original issue or upon transfer or assignment) likewise covenants and agrees, notwithstanding anything to the contrary contained in any of the Subordinated Debt Documents, that the payment of any and all of the Subordinated Debt shall be subordinate and subject in right and time of payment, to the extent and in the manner hereinafter set forth, to the prior payment in full of the Senior Debt.  Each holder of Senior Debt, whether now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Debt in reliance upon the provisions contained in this Agreement.
 
2.2.              Liquidation, Dissolution, Bankruptcy .  In the event of any Proceeding involving any Company:
(a)
All Senior Debt shall first be paid in full before any Distribution, whether in cash, securities or other property, shall be made to Subordinated Creditor on account of any Subordinated Debt.
(b)
Any Distribution, whether in cash, securities or other property which would otherwise, but for the terms hereof, be payable or deliverable in respect of the Subordinated Debt shall be paid or delivered directly to Agent (to be held and/or applied by Agent in accordance with the terms of the Senior Debt Documents) until all Senior Debt is paid in full.  The Subordinated Creditor irrevocably authorizes, empowers and directs any debtor, debtor in possession, receiver, trustee, liquidator, custodian, conservator or other Person having authority, to pay or otherwise deliver all such Distributions to Agent.  The Subordinated Creditor also irrevocably authorizes and empowers Agent, in the name of the Subordinated Creditor, to demand, sue for, collect and receive any and all such Distributions.
(c)
The Subordinated Creditor agrees to execute, verify, deliver and file any proofs of claim in respect of the Subordinated Debt requested by Agent in connection with any such Proceeding and hereby irrevocably authorizes, empowers and appoints Agent its agent and attorney-in-fact to (i) execute, verify, deliver and file such proofs of claim upon the failure of the Subordinated Creditor promptly to do so prior to 30 days before the expiration of the time to file any such proof of claim and (ii) vote such claim in any such Proceeding upon the failure of the Subordinated Creditor to do so prior to 15 days before the expiration of the time to vote any such claim; provided, Agent shall have no obligation to execute, verify, deliver, file and/or vote any such proof of claim.  In the event that Agent votes any claim in accordance with the authority granted hereby, the Subordinated Creditor shall not be entitled to change or withdraw such vote.
(d)
The Subordinated Creditor agrees that it will consent to, and not object to or oppose any use of cash collateral consented to by Agent or any financing provided by any Senior Lender to any Company (or any financing provided by any other Person consented to by Agent) (collectively, " DIP Financing ") on such terms and conditions as Agent, in its sole discretion, may decide.  In connection therewith, any Company or any of their subsidiaries may grant to Agent and Senior Lenders or such other lender, as applicable, liens and security interests upon all of the property of any of the Companies or any of their subsidiaries, which liens and security interests (i) shall secure payment of all Senior Debt (whether such Senior Debt arose prior to the commencement of any Proceeding or at any time thereafter) and all other financing provided by any Senior Lender or consented to by Agent during the Proceeding and (ii) shall be superior in priority to any liens and security interests, if any, in favor of the Subordinated Creditor on the property of any of the Companies and their Subsidiaries that the Subordinated Creditor may have notwithstanding the prohibition of such security interests or liens under this Agreement.  If, in connection with any cash collateral use or DIP Financing, any liens and security interests on the Collateral held by Agent are subject to a surcharge or are subordinated to an administrative priority claim, a professional fee "carve out," or fees owed to the United States Trustee, then any liens on the Collateral that the Subordinated Creditor may have notwithstanding the prohibition of such liens under this Agreement shall also be subordinated to such interest or claim and shall remain subordinated to the liens and security interests on the Collateral of Agent consistent with this Agreement.  The Subordinated Creditor agrees that it will consent to, and not object to or oppose, a sale or other disposition of any property securing all of any part of any Senior Debt free and clear of security interests or liens that the Subordinated Creditor may have notwithstanding the prohibition of such security interests or liens under this Agreement, or other claims of the Subordinated Creditor under the Bankruptcy Code, including Sections 363, 365 and 1129 of the Bankruptcy Code, if Agent has consented to such sale or disposition.  The Subordinated Creditor agrees not to assert any right it may have in any Proceeding arising from any Company's use, sale or other disposition of Collateral and agrees that it will not seek (or support any other Person seeking) to have any stay, whether automatic or otherwise, lifted with respect to any Collateral without the prior written consent of Agent.  The Subordinated Creditor agrees that it will not, and will not permit, any of its Affiliates to, directly or indirectly provide, participate in or otherwise support, any financing in a Proceeding to any Company without the prior written consent of Agent.  The Subordinated Creditor will not object to or oppose any adequate protection sought by Agent or any Senior Lender or object to or oppose any motion by Agent to lift the automatic stay or any other stay in any Proceeding.  The Subordinated Creditor will not seek or assert any right it may have for adequate protection (it being understood and agreed that at all times the Subordinated Debt shall be unsecured) of its interest in any Collateral.  The Subordinated Creditor waives any claim it may now or hereafter have arising out of Agent's or Senior Lenders' election, in any Proceeding, of the application of Section 1111(b)(2) of the Bankruptcy Code, and/or any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code by any Company, as debtor in possession.  The Subordinated Creditor further agrees that it shall not, without Agent's prior written consent, commence or continue any Proceeding, propose any plan of reorganization, arrangement or proposal or file any motion, pleading or material in support of any motion or plan of reorganization, arrangement or proposal that would materially impair the rights of the Senior Lenders, is in conflict with the terms of this Agreement, or is opposed by Senior Lenders or Agent, or oppose any plan of reorganization or liquidation supported by Agent.
(e)
The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights and priorities of Senior Secured Parties and the Subordinated Creditor even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed in connection with any such Proceeding.
2.3.              Subordinated Debt Payment Restrictions .  Notwithstanding the terms of the Subordinated Debt Documents, each Company hereby agrees that it may not make, and the Subordinated Creditor hereby agrees that it will not accept, any Distribution with respect to the Subordinated Debt until the Senior Debt is paid in full other than, subject to the terms of subsection 2.2 of this Agreement, Permitted Subordinated Debt Payments; provided , however , that the Companies and the Subordinated Creditor further agree that no Permitted Subordinated Debt Payment may be made by a Company or accepted by the Subordinated Creditor if, at the time of such payment, either (i) a Senior Default exists, or (ii) Excess Availability (as defined in the Senior Credit Agreement, or, following a Permitted Refinancing, a term of like meaning under the Senior Debt Documents then in effect) shall not equal or exceed $1,500,000 after giving effect to the making of such payment.  The Subordinated Creditor hereby agrees that, notwithstanding any provision of the any Subordinated Debt Documents to the contrary, no default or event of default shall be deemed to exist under any Subordinated Debt Document as a result of any Distribution that is otherwise required under any Subordinated Debt Document not being made to the extent that such Distribution with respect to the Subordinated Debt is not permitted to be made pursuant to this Agreement.
 
2.4.              Subordinated Debt Standstill Provisions .  Until the Senior Debt is paid in full, the Subordinated Creditor shall not, without the prior written consent of Agent, take any Enforcement Action with respect to the Subordinated Debt or under the Subordinated Debt Documents.  Any Distributions or other proceeds of any Enforcement Action obtained by the Subordinated Creditor shall in any event be held in trust by it for the benefit of Agent and Senior Lenders and promptly paid or delivered to Agent for the benefit of Senior Lenders in the form received until the Senior Debt is paid in full.
 
2.5.              Incorrect Payments .  If any Distribution on account of the Subordinated Debt not permitted to be made by a Company or accepted by the Subordinated Creditor under this Agreement is received by the Subordinated Creditor, such Distribution shall not be commingled with any of the assets of the Subordinated Creditor, shall be held in trust by the Subordinated Creditor for the benefit of Senior Secured Parties and shall be promptly paid over to Agent for application (in accordance with the Senior Debt Documents ) to the payment of the Senior Debt then remaining unpaid, until all of the Senior Debt is paid in full.
 
2.6.              No Collateral / Guaranties for Subordinated Debt; Subordination of Liens and Security Interests; Agreement Not to Contest; Agreement to Release Liens .  Until all of the Senior Debt has been paid in full, none of the Subordinated Debt shall be permitted to be secured (including, without limitation, by any liens or security interests in any of the Collateral) by any assets, or guarantied by any Person.  In the event that, notwithstanding the foregoing, the Subordinated Debt is secured at any time, then any liens and security interests of the Subordinated Creditor in the Collateral or any other assets of the Companies which may exist at any time (a) shall be and hereby are subordinated for all purposes and in all respects to the liens and security interests of Agent and Senior Secured Parties in the Collateral and such other assets, regardless of the time, manner or order of perfection of any such liens and security interests and regardless of the validity, perfection or enforceability of such liens and security interests of Agent, and (b) shall be immediately released by the Subordinated Creditor upon demand by Agent.  The Subordinated Creditor agrees that it will not at any time contest the validity, perfection, priority or enforceability of the Senior Debt, the Senior Debt Documents, or the liens and security interests of Agent and Senior Secured Parties in the Collateral or any other assets securing the Senior Debt.  In the event that Agent or a Company desires to sell, lease, license or otherwise dispose of any interest in any of the Collateral (including the equity interests of a Company) and Agent consents to such Disposition, the Subordinated Creditor shall be deemed to have consented to such Disposition and such Disposition shall be free and clear of any liens and security interests of the Subordinated Creditor in such Collateral (and if such Disposition involves the equity interests of a Company, the Subordinated Creditor shall release such Company from any guaranty or other obligation owing to the Subordinated Creditor) (it being understood that no Company other than Telos is permitted to be obligated in respect of the Subordinated Debt) and any purchaser of any Collateral may rely on this Agreement as evidence of the Subordinated Creditor's consent to such Disposition and that such Disposition is free and clear of any liens and security interests of the Subordinated Creditor in such Collateral (and if such Disposition involves the equity interests of a Company, that such Company is released from any guaranty or other obligation owing to the Subordinated Creditor) (it being understood that no Company other than Telos is permitted to be obligated in respect of the Subordinated Debt).  The Subordinated Creditor shall (or shall cause its agent) to promptly execute and deliver to Agent such termination statements and releases as Agent shall request to effect the release of the liens and security interests of the Subordinated Creditor in such Collateral in accordance with this subsection 2.6 .  In furtherance of the foregoing, the Subordinated Creditor hereby irrevocably appoints Agent its attorney-in-fact, with full authority in the place and stead of the Subordinated Creditor and in the name of the Subordinated Creditor or otherwise, to execute and deliver any document or instrument which the Subordinated Creditor may be required to deliver pursuant to this subsection 2.6 .
 
2.7.              Sale, Transfer or other Disposition of Subordinated Debt .
(a)
The Subordinated Creditor shall not sell, assign, pledge, dispose of or otherwise transfer all or any portion of the Subordinated Debt or any Subordinated Debt Document:   (i) without   giving prior written notice of such action to Agent and obtaining the prior written consent of Agent to such transfer, and (ii) unless, prior to the consummation of any such action, the transferee thereof shall execute and deliver to Agent an agreement joining such transferee as a party to this Agreement as the Subordinated Creditor or an agreement substantially identical to this Agreement, providing for the continued subordination of the Subordinated Debt to the Senior Debt as provided herein and for the continued effectiveness of all of the rights of Agent and Senior Lenders arising under this Agreement.
(b)
Notwithstanding the failure of any transferee to execute or deliver an agreement joining such transferee as a party to this Agreement as the Subordinated Creditor or an agreement substantially identical to this Agreement, the subordination effected hereby shall survive any sale, assignment, pledge, disposition or other transfer of all or any portion of the Subordinated Debt, and the terms of this Agreement shall be binding upon the successors and assigns of the Subordinated Creditor, as provided in Section 9 hereof.
2.8.              Legends .  Until the termination of this Agreement in accordance with Section 15 hereof, the Subordinated Creditor will cause to be clearly, conspicuously and prominently inserted on the face of the Subordinated Note, the Subordinated Loan Agreement and any other Subordinated Debt Document, as well as any renewals or replacements thereof, the following legend:
"This [ agreement/instrument ] and the rights and obligations evidenced hereby are subordinate in the manner and to the extent set forth in that certain Subordination and Intercreditor Agreement (the "Subordination Agreement") dated as of March __, 2015 among JP Charitable Foundation, Telos Corporation, Xacta Corporation, Ubquity.com, Inc. and Teloworks, Inc. (collectively, the "Companies") and Wells Fargo Capital Finance, LLC ("Agent"), to the indebtedness (including interest) owed by Telos Corporation and Xacta Corporation (and guarantied by Ubiquity.com, Inc. and Teloworks, Inc.) pursuant to that certain Second Amended and Restated Loan and Security Agreement dated as of May 17, 2010 among the Companies, Agent and the lenders from time to time party thereto and the other Senior Debt Documents (as defined in the Subordination Agreement), as such   Credit Agreement and other Senior Debt Documents have been and hereafter may be amended, supplemented, restated, amended and restated or otherwise modified from time to time and to indebtedness refinancing the indebtedness under those agreements as contemplated by the Subordination Agreement; and each holder of this instrument, by its acceptance hereof, irrevocably agrees to be bound by the provisions of the Subordination Agreement."
2.9.              Obligations Hereunder Not Affected .  All rights and interest of Senior Secured Parties hereunder, and all agreements and obligations of the Subordinated Creditor and Companies hereunder, shall remain in full force and effect irrespective of:
(a)
any lack of validity or enforceability of any document evidencing any of the Senior Debt;
(b)
any change in the time, manner or place of payment of, or any other term of, all or any of the Senior Debt, or any other permitted amendment or waiver of or any release or consent to departure from any of the Senior Debt Documents;
(c)
any exchange, subordination, release or non-perfection of any collateral for all or any of the Senior Debt;
(d)
any failure of any Senior Secured Party to assert any claim or to enforce any right or remedy against any other party hereto under the provisions of this Agreement or any Senior Debt Document other than this Agreement;
(e)
any reduction, limitation, impairment or termination of the Senior Debt for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and Companies and the Subordinated Creditor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of invalidity, illegality, nongenuiness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Senior Debt; and
(f)
any other circumstance which might otherwise constitute a defense available to, or a discharge of, Companies in respect of the Senior Debt or the Subordinated Creditor in respect of this Agreement.
The Subordinated Creditor acknowledges and agrees that Senior Secured Parties may in accordance with the terms of the Senior Debt Documents, without notice or demand and without affecting or impairing the Subordinated Creditor's obligations hereunder, (i) amend, restate, amended and restate, supplement or otherwise modify the Senior Debt Documents in any manner whatsoever; (ii) take or hold security for the payment of the Senior Debt and exchange, enforce, foreclose upon, waive and release any such security; (iii) apply such security and direct the order or manner of sale thereof as Agent and Senior Lenders in their sole discretion, may determine; (iv) release and substitute one or more endorsers, warrantors, borrowers or other obligors; and (v) exercise or refrain from exercising any rights against any Company or any other Person.  The Senior Debt shall continue to be treated as Senior Debt and the provisions of this Agreement shall continue to govern the relative rights of Senior Secured Parties and the Subordinated Creditor even if all or part of the Senior Debt or the security interests securing the Senior Debt are subordinated, set aside, avoided, invalidated or disallowed.
2.10.              Marshaling .  The Subordinated Creditor hereby waives any rights it may have under applicable law to assert the doctrine of marshaling or to otherwise require any Senior Secured Party to marshal any property of any Company or of any guarantor or other obligor of the Senior Debt for the benefit of the Subordinated Creditor.
 
2.11.              Application of Proceeds from Sale or other Disposition of the Collateral .  In the event of any Disposition (including a casualty loss or taking through eminent domain) of the Collateral, the proceeds resulting therefrom (including insurance proceeds) shall be applied to the Senior Debt in the order and manner set forth in the Senior Debt Documents until such time as the Senior Debt is Paid in Full.
 
2.12.              Rights Relating to Agent's Actions with respect to the Collateral .  The Subordinated Creditor hereby waives, to the extent permitted by applicable law, any rights which it may have to enjoin or otherwise obtain a judicial or administrative order preventing Senior Secured Parties from taking, or refraining from taking, any action with respect to all or any part of the Collateral.  Without limitation of the foregoing, the Subordinated Creditor hereby agrees (a) that it has no right to direct or object to the manner in which a Senior Secured Party applies the proceeds of the Collateral resulting from the exercise by Senior Secured Parties of rights and remedies under the Senior Debt Documents to the Senior Debt, (b) that it waives any right to object to any action or inaction by any Senior Secured Party with respect to exercising its rights or remedies under the Senior Debt Documents or with respect to the Collateral (including in connection with any foreclosure or enforcement of liens in respect of Collateral), and (c) no Senior Secured Party has assumed any obligation to act as the agent for the Subordinated Creditor with respect to the Collateral.  The Subordinated Creditor shall not object to any proposed retention or acceptance of Collateral by a Senior Secured Party in full or partial satisfaction of such Senior Secured Party's Senior Debt and agrees that any such retention or acceptance by a Senior Secured Party shall be free and clear of any security interests and liens of the Subordinated Creditor (it being understood that the Subordinated Creditor shall not be permitted to have any liens or security interests on any of the Collateral).
 
2.13.              No Forgiveness or Exchange of Subordinated Debt .  The Subordinated Debt shall not be forgiven or otherwise cancelled without the prior written consent of Agent.  The Subordinated Debt shall not be exchanged for or otherwise converted into equity without the prior written consent of Agent.
 
3.              Modifications .
3.1.              Modifications to Senior Debt Documents .  Senior Lenders may at any time and from time to time without the consent of or notice to the Subordinated Creditor, without incurring liability to the Subordinated Creditor and without impairing or releasing the obligations of the Subordinated Creditor under this Agreement, change the manner or place of payment, increase or reduce the amount of, or extend the time of payment of or renew or alter any of the terms of the Senior Debt, or amend, supplement, restate, amend and restate or otherwise modify in any manner any agreement, note, guaranty or other instrument evidencing or securing or otherwise relating to the Senior Debt.
 
3.2.              Modifications to Subordinated Debt Documents .  Until the Senior Debt has been paid in full, and notwithstanding anything to the contrary contained in the Subordinated Debt Documents, the Subordinated Creditor shall not, without the prior written consent of Agent, amend, modify or supplement the Subordinated Debt Documents.
 
4.              Representations and Warranties .
4.1.              Representations and Warranties of Subordinated Creditor .  The Subordinated Creditor hereby represents and warrants to Agent and Senior Lenders that as of the date hereof (and as of all times with respect to clause (f) below):  (a) the Subordinated Creditor is a charitable foundation, duly formed and validly existing under the laws of the country of Switzerland; (b) the Subordinated Creditor has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by the Subordinated Creditor will not violate or conflict with the foundational, organizational or other governing documents of the Subordinated Creditor, any material agreement binding upon the Subordinated Creditor or any law, regulation or order or require any consent or approval which has not been obtained; (d) this Agreement is the legal, valid and binding obligation of the Subordinated Creditor, enforceable against the Subordinated Creditor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles; and (e) the Subordinated Creditor is the sole owner, beneficially and of record, of the Subordinated Debt Documents and the Subordinated Debt; and (f) the Subordinated Debt is (i) not secured any liens or any security interests in the Collateral or any other assets of any Company or any other Person, and (ii) is solely on obligation of Telos and is not guarantied by any Person.
 
4.2.              Representations and Warranties of Agent .  Agent hereby represents and warrants to the Subordinated Creditor that as of the date hereof:  (a) Agent is a Delaware limited liability company; (b) Agent has the power and authority to enter into, execute, deliver and carry out the terms of this Agreement, all of which have been duly authorized by all proper and necessary action; (c) the execution of this Agreement by Agent will not violate or conflict with the organizational documents of Agent, any material agreement binding upon Agent or any law, regulation or order or require any consent or approval which has not been obtained; and (d) this Agreement is the legal, valid and binding obligation of Agent, enforceable against Agent in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles.
 
5.              Subrogation; Recovery .  The Subordinated Creditor will not exercise (i) any right of subrogation that it may now or hereafter have or obtain in respect of the rights of Agent or any other Senior Secured Party against any Company, any guarantor of any of the Senior Debt or any of the Collateral or (ii) any right to participate in any claim or remedy of Agent and any other Senior Secured Party against any Company, any guarantor of any of the Senior Debt or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, in each case until all of the Senior Debt has been Paid in Full.  If Agent or any Senior Lender is required to disgorge any proceeds of Collateral, payment or other amount received by such Person (whether because such proceeds, payment or other amount is invalidated, declared to be fraudulent or preferential or otherwise) or turn over or otherwise pay any amount (a " Recovery ") to the estate or to any creditor or representative of a Company or any other Person, then the Senior Debt shall be reinstated (to the extent of such Recovery) as if such Senior Debt had never been paid and to the extent the Subordinated Creditor has received proceeds, payments or other amounts to which the Subordinated Creditor would not have been entitled under this Agreement had such reinstatement occurred prior to receipt of such proceeds, payments or other amounts, the Subordinated Creditor shall turn over such proceeds, payments or other amounts to Agent for reapplication to the Senior Debt.  A Distribution made pursuant to this Agreement to Agent or Senior Lenders which otherwise would have been made to the Subordinated Creditor is not, as between the Companies and the Subordinated Creditor, a payment by the Companies to or on account of the Senior Debt.
 
6.              Modification .  Any modification or waiver of any provision of this Agreement, or any consent to any departure by any party from the terms hereof, shall not be effective in any event unless the same is in writing and signed by Agent and the Subordinated Creditor, and then such modification, waiver or consent shall be effective only in the specific instance and for the specific purpose given.  Any notice to or demand on any party hereto in any event not specifically required hereunder shall not entitle the party receiving such notice or demand to any other or further notice or demand in the same, similar or other circumstances unless specifically required hereunder.
 
7.              Further Assurances .  Each party to this Agreement promptly will execute and deliver such further instruments and agreements and do such further acts and things as may be reasonably requested in writing by any other party hereto that may be necessary or desirable in order to effect fully the purposes of this Agreement.
 
8.              Notices .  Unless otherwise specifically provided herein, any notice delivered under this Agreement shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier service or certified or registered United States mail and shall be deemed to have been given (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a business day before 4:00 p.m. (Chicago time) or, if not, on the next succeeding business day; (c) if delivered by overnight courier, one business day after delivery to such courier properly addressed; or (d) if by United States mail, four business days after deposit in the United States mail, postage prepaid and properly addressed.
Notices shall be addressed as follows:
If to Subordinated Creditor:


JP Charitable Foundation
Chemin d'Amon 2
Chalet Ty'Fano
1936 Verbier
Switzerland
Attention:  John R. C. Porter
Telecopy:  +41 22 908 11 91
Email:  jrcporter@gmail.com
With a copy to:


Silex Trust Company Ltd.
6 Rue Kleberg
1201 Geneva
Switzerland
Telecopy:  +41 22 908 11 91
Attn: Brian Padgett
Email:  brian@silextrust.com

If to a Company:


c/o TELOS CORPORATION
19886 Ashburn Road
Ashburn, Virginia  20147
Attn:  General Counsel
Fax No. (703) 724-1468
If to Agent or Senior Lenders:


WELLS FARGO CAPITAL FINANCE, LLC
One Boston Place, 18th Floor
Boston, Massachusetts  02108
Attn:  Technology Finance Division Manager
Fax No. (617) 523-1697
With a copy to:


Goldberg Kohn Ltd.
55 East Monroe Street, Suite 3300
Chicago, Illinois  60603
Attention: Gary Zussman, Esq.
Telecopy: (312) 863-7440
or in any case, to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 8 .
9.              Successors and Assigns; Permitted Refinancing .  This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and assigns of Agent, Senior Lenders, the Subordinated Creditor and the Companies.  Senior Lenders may, from time to time, without notice to the Subordinated Creditor, assign or transfer any or all of the Senior Debt or any interest therein to any Person and, notwithstanding any such assignment or transfer, or any subsequent assignment or transfer, the Senior Debt shall, subject to the terms hereof, be and remain Senior Debt for purposes of this Agreement, and every permitted assignee or transferee of any of the Senior Debt or of any interest therein shall, to the extent of the interest of such permitted assignee or transferee in the Senior Debt, be entitled to rely upon and be the third party beneficiary of the subordination provided under this Agreement and shall be entitled to enforce the terms and provisions hereof to the same extent as if such assignee or transferee were initially a party hereto.  The Subordinated Creditor agrees that any party that consummates a Permitted Refinancing may rely on and enforce this Agreement.  The Subordinated Creditor further agrees that it will, at the request of Agent, enter into an agreement, in the form of this Agreement, mutatis   mutandis , with the party that consummates the Permitted Refinancing; provided, that the failure of the Subordinated Creditor to execute such an agreement shall not affect such party's right to rely on and enforce the terms of this Agreement.
 
10.              Relative Rights .  This Agreement shall define the relative rights of Senior Secured Parties and the Subordinated Creditor.  Nothing in this Agreement shall (a) impair, as among the Companies and Senior Secured Parties and as between the Companies and the Subordinated Creditor, the obligation of the Companies with respect to the payment of the Senior Debt and the Subordinated Debt in accordance with their respective terms or (b) affect the relative rights of Senior Secured Parties or the Subordinated Creditor with respect to any other creditors of any Company.
 
11.              Conflict .  In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Subordinated Debt Documents, the provisions of this Agreement shall control and govern.
 
12.              Headings .  The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof.
 
13.              Counterparts .  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.    Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement.
 
14.              Severability .  In the event that any provision of this Agreement is deemed to be invalid, illegal or unenforceable by reason of the operation of any law or by reason of the interpretation placed thereon by any court or governmental authority, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Agreement.
 
15.              Continuation of Subordination; Termination of Agreement .  This Agreement shall be applicable both before and after the commencement of any Proceeding and all converted or succeeding cases in respect thereof.  Accordingly, the provisions of this Agreement are intended to be and shall be enforceable as a subordination agreement within the meaning of Section 510 of the Bankruptcy Code.  This Agreement shall remain in full force and effect until the payment in full of the Senior Debt after which this Agreement shall terminate without further action on the part of the parties hereto; provided , that if any payment is, subsequent to such termination, recovered from any holder of Senior Debt, this Agreement shall be reinstated; provided , further that a Permitted Refinancing shall not be deemed to be payment in full of the Senior Debt.
 
16.              APPLICABLE LAW .  THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
 
17.              CONSENT TO JURISDICTION .  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS.  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS.  EACH OF THE SUBORDINATED CREDITOR AND EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE SUBORDINATED CREDITOR AND EACH COMPANY AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE SAME HAS BEEN POSTED.
 
18.              WAIVER OF JURY TRIAL .  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE SUBORDINATED DEBT DOCUMENTS OR ANY OF THE SENIOR DEBT DOCUMENTS.  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE SENIOR DEBT DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.  EACH OF THE SUBORDINATED CREDITOR, EACH COMPANY AND AGENT WARRANTS AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.
 
19.              Additional Companies .  Telos shall cause any Person that becomes a direct or indirect subsidiary of Telos to execute a joinder (in form and substance satisfactory to Agent) to this Agreement to bind such Person to this Agreement as a Company (and the Subordinated Creditor agrees and acknowledge that upon execution of such a joinder such Person shall automatically constitute a "Company" for purposes of this Agreement without any need for consent or acknowledgment by the Subordinated Creditor).
 
20.              Prevailing Parties .  In the event it becomes necessary for any Senior Secured Party or the Subordinated Creditor to commence or become a party to any proceeding or action to enforce the provisions of this Agreement, the court or body before which the same shall be tried shall award to the prevailing party all costs and expenses thereof, including reasonable attorneys' fees, the usual and customary and lawfully recoverable court costs, and all other expenses in connection therewith.


IN WITNESS WHEREOF, Subordinated Creditor, the Companies and Agent have caused this Agreement to be executed as of the date first above written.


SUBORDINATED CREDITOR :
 
JP CHARITABLE FOUNDATION
 
 
 
/s/ John R.C. Porter
John R.C. Porter, Trustee
 
 
/s/ Brian Padgett
Brian Padgett, Trustee
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COMPANIES:
 
     
TELOS CORPORATION
 
A Maryland corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
     
XACTA CORPORATION
 
A Delaware corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
UBIQUITY.COM, INC.
 
A Delaware corporation
 
     
By
/s/ Jefferson V. Wright
 
Title
EVP & General Counsel
 
     
     
TELOWORKS, INC.
 
A Delaware corporation
 
     
By
/s/ David S. Easley
 
Title
President
 



AGENT:
 
WELLS FARGO CAPITAL FINANCE, LLC., as Agent
 
By
/s/ Jordan E. Hilliard
Name
 Jordan E. Hillard
Title
Vice President