The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to consolidated financial statements included
in Part II, Item 8 of this Annual Report on Form 10-K, ("10-K"). In addition to
historical financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results and timing of selected events in future periods may differ
materially from those anticipated or implied in these forward-looking statements
as a result of many factors, including those discussed under Item 1A, "  Risk
Factors  ," and elsewhere in this 10-K. See also "  Cautionary Note Regarding
Forward-Looking Statements  " at the beginning of this 10-K.

General Overview

We offer technologically advanced, software-based security solutions that
empower and protect the world's most security-conscious organizations against
rapidly evolving, sophisticated and pervasive threats. Our portfolio of security
products, services and expertise empower our customers with capabilities to
reach new markets, serve their stakeholders more effectively, and successfully
defend the nation or their enterprise. We protect our customers' people,
information, and digital assets so they can pursue their corporate goals and
conduct their global missions with confidence in their security and privacy.

For an overview of our operating segments, including a discussion of our major
products and services and the reorganization of our segments into two operating
segments, see our business segment discussion contained in Item 1. The segment
information presented in this management's discussion and analysis for fiscal
years 2020 and 2019 has been restated to conform with the changes to our
operating structure in fiscal year 2021.

Business Environment



Our business performance continues to be heavily affected by the overall level
of U.S. government spending and the alignment of our solutions with the
priorities of the U.S. government. U.S. government spending and contracts
continue to be affected by the federal budget and appropriations process and
related legislation.

In fiscal years 2020 and 2021, the COVID-19 pandemic and associated economic
dislocation in the United States resulted in an overwhelming federal response,
including enactment of multiple significant and comprehensive emergency
appropriations and economic stimulus measures. These were in addition to the
annual appropriations legislation for FY 2021, which was not enacted into law
until late December 2020. This was nearly three months after the beginning of
the fiscal year, during which time the government operated under a series of
Continuing Resolutions ("CRs"), which strictly limited new spending initiatives.

Due to delays again this year in the passage of FY 2022 appropriations
legislation, the federal government had been operating since October 1, 2021
under the terms of another series of CRs, which limited spending to the prior
year's funding levels and generally prohibited new spending initiatives and
contract starts. But Congress finally reached agreement in March on FY 2022
appropriations legislation, which will allow our federal customers to finally
operate under more normal conditions and with updated funding levels through the
remainder of fiscal year 2022. Of note, the final FY 2022 appropriations bill
provides $728.5 billion for the Department of Defense and related activities.
This amount is $32.5 billion more than the FY 2021 enacted level, and is an
increase above the level proposed last spring by President Biden for FY 2022.

This delay in enacting final FY 2022 appropriations legislation has postponed
submission to Congress of the President's FY 2023 budget request, and could
delay the congressional budget and appropriations process for the next fiscal
year. These delays could, in turn, impact future planning by Telos and its
government customers.

In November 2021, Congress gave final approval to and the President signed into
law a multi-year, $1.2 trillion infrastructure package, the Infrastructure
Investment and Jobs Act, which contains a number of provisions dealing with
cybersecurity and provides funding for state and local government cybersecurity
grant. We believe these provisions could ultimately result in an increased need
for solutions and services provided by Telos.

At the same time, such large increases in federal spending, following the
enormous emergency spending packages during the pandemic and their resulting
increases in the budget deficit will necessarily factor into future federal
budget planning and spending decisions, affecting to an unknown degree the
government contracts that we hold and the federal procurement for which we would
otherwise compete.
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Despite the pandemic's resultant massive shift to teleworking by federal
employees and contractors, the government has successfully maintained the
continuity of services as has Telos. More recently, as the government has
proceeded to develop and implement its reopening process, and to make
adjustments based on changing circumstances, officials have said they will seek
to continue to maximize the use of teleworking by federal employees. This stance
has continued during the most recent, renewed surge of COVID-19 variant
transmission. As such, with much of the business of government still being
conducted by federal employees working remotely through the use of information
technology systems, we believe there will continue to be a need on the part of
the government for the types of solutions and services provided by Telos.

President Biden's May 12, 2021 Executive Order on "Improving the Nation's
Cybersecurity" acknowledged the severity and scope of the cybersecurity
challenges facing the public and private sectors, the American people and our
economy. It gave the following direction for federal departments and agencies to
modernize government cybersecurity: move more rapidly to adopt secure cloud
services; adopt multi-factor authentication; push for increased use of zero
trust architecture; and improve the security and integrity of the software
supply chain, with a priority on addressing critical software. The executive
order also called for improving communications with cloud service providers
through automation and standardization of messages at each stage of the FedRAMP
process, and for other changes in an effort to accelerate and improve the
process.

Subsequently, federal agencies, including the Cybersecurity & Infrastructure
Security Agency ("CISA") and the TSA, which have specific responsibilities for
various aspects of government and private sector cybersecurity, have taken steps
to enhance public sector and critical infrastructure cybersecurity and to
accelerate adoption of zero trust architecture throughout the federal
government.

Pursuant to the cybersecurity executive order, the Biden Administration is
putting emphasis on greater use of automation in the FedRAMP process, and on
supply chain risk management, which are also focus areas for Telos. NIST is
developing a Ransomware profile, based on the NIST Cybersecurity Framework,
which is specifically intended to help organizations manage ransomware-related
risk, and Telos solutions will support this. Finally on FedRAMP, this process is
now being adopted at the state level, and we believe this StateRAMP effort will
expand the market for Telos' FedRAMP offerings.

Also to carry out that executive order, CISA last fall issued a draft of its
Zero Trust Maturity Model to serve as a road map for agencies as they develop
and implement zero trust architecture. Subsequently, the Office of Management
and Budget on January 26, 2022 released its final Zero Trust Architecture
Strategy for federal agencies, the goals of which are organized using CISA's
Zero Trust Maturity Model. Agencies will be required to meet specific zero trust
security goals by the end of FY 2024, and they must develop, within 60 days of
the strategy's issuance, zero trust migration plans that meet the requirements
of this strategy and include budget planning for those efforts. Further, CISA
has indicated it intends to update its draft Zero Trust Maturity Model in order
to better align programs and services, including its Continuous Diagnostics and
Mitigation ("CDM") program, with government-wide adoption of zero-trust security
architectures in 2022.

In addition, a national security memorandum signed by President Biden on January
19, 2022 established guidelines for applying parts of his May 2021 cybersecurity
executive order to the national security systems of the Defense Department and
Intelligence Community, including pushing for adoption of zero trust
architecture and other cybersecurity improvements.

Cybersecurity Landscape



Over the past few years, continued and increasingly damaging ransomware and
other cyberattacks against federal, state and local governments, the K-12 and
higher education sectors, and private sector enterprises have resulted in
intensified efforts to better defend against such attacks. The growing demand
for these solutions continues to provide Telos with the privilege of offering
our expertise to protect these vitally important organizations.

Ransomware remains arguably the most severe cyber threat to enterprises in the
commercial and SLED sectors. Our Xacta offering empowers these organizations and
institutions to maintain a strong cyber risk posture to minimize the risk of
ransomware gaining a foothold in their IT environment. Should ransomware get
loose in the enterprise network, Telos Ghost, our virtual obfuscation network
offering, can hide vital resources from view to prevent the payload from
reaching them.

Critical infrastructure and industrial IoT are among the categories at greatest
risk of cyberattacks. Energy, utilities, transportation, and food supply were
among the critical infrastructure sectors that experienced high-profile breaches
or ransomware attacks over the past year. Telos Ghost can hide critical IoT and
ICS from the public internet to keep them from being compromised. Telos Ghost
can also cordon off financial data, medical records, intellectual property, and
other crown-jewel assets from visibility or accessibility by adversaries.
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Telos Ghost is a complement to zero trust security, creating an additional layer
of defense against intruders by hiding critical resources and users in an
anonymous undiscoverable network. As noted above, it protects the crown-jewel
assets of critical infrastructure from unauthorized access. Xacta streamlines
and automates the critical processes of the leading cybersecurity standards and
frameworks, in particular FedRAMP, allowing all process participants to
collaborate within the same Xacta application to attain a FedRAMP Authority to
Operate. Xacta is also a trailblazer in adopting the Open Security Controls
Assessment Language, a multi-format framework adopted by FedRAMP to allow
security professionals to automate security assessment, auditing, and continuous
monitoring processes.

The Cyber Incident Reporting for Critical Infrastructure Act of 2022, which was
signed into law March 15, will require critical infrastructure owners and
operators as well as federal agencies to report to CISA significant cyber
incidents within 72 hours and any ransomware payments made within 24 hours.
Telos believes that such threat of having to make such disclosures will make
organizations even more sensitive to boosting their cybersecurity posture, and
that our Xacta solution will help illuminate their risk profile so that they can
better understand the issues and address those issues proactively.

Government mandates and initiatives to assure stronger security in highly
regulated industries, as noted above, also lead to opportunities for Xacta. An
update to the research study Telos conducted last year reveals that audit
fatigue continues to burden these organizations, with automation solutions being
recognized as the most effective remedy for the many repetitive and redundant
tasks that security compliance requires. Xacta streamlines, harmonizes, and
automates the security controls and processes that comprise the leading
cybersecurity standards and frameworks, in on-premises, cloud, hybrid, and
multi-cloud environments.

The Securities and Exchange Commission has also recently proposed new, mandatory
cyber risk management and cybersecurity incident reporting requirements for
publicly traded companies. Telos believes this will make sure companies have in
place a sound cyber risk management strategy based on recognized best practices,
such as the National Institute of Standards and Technology Cybersecurity
Framework (NIST CSF), and Telos solutions will support this.

Finally, as a whole, the COVID-19 pandemic has resulted in the acceleration of
digital transformation and cloud adoption within the government and beyond,
which could increase demand for Xacta and Telos Ghost. Xacta is engineered to
manage risk and compliance of complex cloud and multi-cloud environments, a key
capability for federal agencies and regulated industries that need to gain and
maintain compliance with cloud-specific security regulations. Telos Ghost is a
cloud-native, as-as-service offering that delivers network obfuscation and
managed attribution capabilities on a global scale to support the cloud-enabled
enterprise.

COVID-19 Pandemic

The COVID-19 global pandemic has continued to create significant and
unprecedented challenges, and during these highly uncertain times, our top
priority remains the health and safety of our employees, customers and
suppliers, thereby securing the financial well-being of the Company and
supporting business continuity. We are continuing to monitor the most recent
outbreak of COVID-19, to work with our stakeholders to assess further possible
implications to our business, supply chain and customers, and to take actions in
an effort to mitigate any adverse consequences.

Despite the pandemic's resultant shift to teleworking by federal employees and
contractors, the government has successfully maintained continuity of services.
With much of the business of government continuing to be conducted remotely
through the use of information technology systems, we believe there will
continue to be a need on the part of the government for the types of solutions
and services provided by us.

Opportunities, Challenges and Risks



We derive a substantial portion 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 2021, 2020, and 2019,
the Company's revenue derived from firm fixed-price contracts was 87.6%, 84.3%,
and 82.7%, respectively; cost-plus contracts revenue was 7.3%, 8.2%, and 8.2%,
respectively; and time-and-material contracts was 5.1%, 7.5%, and 9.1%,
respectively.
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Our business performance is affected by the overall level of U.S. government
spending and the alignment of our offerings and capabilities with the budget
priorities of the U.S. government. Adverse changes in fiscal and economic
conditions could materially impact our business. Some changes that could have an
adverse impact our business include the implementation of future spending
reductions and government shutdown. Currently, the federal government is
operating under the terms of the CR, until the individual appropriations bills
are enacted.

Despite the budget and competitive pressure affecting the industry, we believe
we are well-positioned to expand existing customer relationships and benefit
from opportunities that we have not previously pursued. In fiscal 2021, we
reported revenue growth driven by strong demands for our advanced security
solutions, and won and retained large-scale and long-term contracts. Further, we
continue to grow our sales channel and partner programs.

The U.S. government has increasingly relied on contracts that are subject to a
competitive bidding process (including indefinite delivery, IDIQ, GSA schedules,
and other multi-award contracts), which has resulted in greater competition and
increased pricing pressure. To cite some of our existing contracts, we provide
different solutions and are party to contracts of varying revenue types under
the Network-Centric Solutions ("NETCENTS")-2 contracts to the U.S. Air Force.
NETCENTS-2 are IDIQ and GWAC, therefore any government customer may utilize the
NETCENTS-2 vehicles to meet its purchasing needs. Consequently, revenue earned
on the underlying NETCENTS-2 delivery orders varies from period to period
according to the customer and solution mix for the products and services
delivered during a particular period, unlike a standalone contract with one
separately identified customer. The contracts themselves do not fund any orders
and they state that the contracts are for an indefinite delivery and indefinite
quantity. The majority of our task/delivery orders have periods of performance
of less than 12 months, which contributes to the variances between interim and
annual reporting periods. We have also been awarded other IDIQ/GWACs, including
the Department of Homeland Security's EAGLE II, GSA Alliant 2, and blanket
purchase agreements under our GSA schedule. We expect that a majority of the
business that we seek in the foreseeable future will be awarded through a
competitive bidding process.

Key Performance Measures



The primary financial performance measures we use to manage our business and
monitor results of operations are revenue, gross profit, and Adjusted EBITDA. We
evaluate our results of operations by considering the drivers causing changes in
these measures. We evaluate significant trends and fluctuations on our contract
portfolio over time due to contract awards and completions, changes in customer
requirements and changes in the volume of product and software sales. Changes in
costs of revenue as a percentage of revenue other than from revenue volume or
cost mix are driven by changes in the compensation expense and other allocated
costs and or cumulative revenue adjustments due to changes in estimates. Changes
in operating cash flows are driven by changes in cash generated through delivery
of products and services, fluctuations in current assets and liabilities and the
impact of changes in the timing of cash receipts or disbursements.
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  Table of     Contents

Results of Operations

Consolidated Overview

The following table sets forth the results of operations and certain
consolidated financial data as a percentage of sales for the periods indicated:

                                                                        Years Ended December 31,
                                            2021                                    2020                                  2019
                                                                      (dollar amounts in thousands)
Revenue                          242,433               100.0  %         179,917               100.0  %        159,218               100.0  %
Cost of sales                    156,404                64.5  %         117,497                65.3  %        106,874                67.1  %
Selling, general and
administrative expenses          127,493                52.6  %          62,123                34.5  %         47,319                29.7  %
Operating (loss) income          (41,464)              (17.1) %             297                 0.2  %          5,025                 3.2  %
Other income (expenses):
Gain on redemption of public
preferred stock                        -                   -  %          14,012                 7.8  %              -                   -  %
Non-operating (expense)
income                              (921)               (0.4) %            (255)               (0.1) %            201                 0.1  %
Interest expense                    (777)               (0.3) %          (7,259)               (4.0) %         (7,467)               (4.7) %
(Loss) income before income
taxes                            (43,162)              (17.8) %           6,795                 3.8  %         (2,241)               (1.4) %
Benefit from income taxes             28                   -  %              46                   -  %            104                 0.1  %
Net (loss) income                (43,134)              (17.8) %           6,841                 3.8  %         (2,137)               (1.3) %
Less: Net income
attributable to
non-controlling interest               -                   -  %          (5,154)               (2.9) %         (4,264)               (2.7) %
Net (loss) income
attributable to Telos
Corporation                  $   (43,134)              (17.8) %       $   1,687                 0.9  %       $ (6,401)               (4.0) %

Years Ended December 31, 2021, 2020, and 2019

Company Results



Revenue increased by $62.5 million or 34.7% in 2021 compared to 2020. Revenue,
excluding the contract with the U.S. Census Bureau of $5.4 million in 2021 and
$31.0 million in 2020, grew 59.2% year-over-year. Revenue increased by $20.7
million or 13.0% in 2020 compared to 2019. The increase in revenue is
attributable to new awards and net increase in volume on various projects within
the business groups. Sales may vary from period to period according to the
solution mix and timing of deliverables for a particular period.

Cost of sales increased by $38.9 million or 33.1% in 2021 compared to 2020. Cost
of sales increased by $10.6 million or 9.9% in 2020 compared to 2019. The
changes in the cost of sales are directly driven by the change in mix and nature
of the programs and an increase in stock-based compensation of $2.6 million in
2021 (none in the comparative prior years).

Gross profit increased by 37.8% to $86.0 million for 2021 from $62.4 million for
2020. Gross profit increased by 19.2% to $62.4 million for 2020 from $52.3
million for 2019. Gross margin increased to 35.5% for 2021 from 34.7% for 2020.
Gross margin increased due to growth in high margin contracts. Gross margin
increased to 34.7% for 2020 from 32.9% for 2019. The change in the gross margin
is due to various mix of contracts in all line of business.

Selling, general, and administrative ("SG&A") expenses increased by 105.2% in
2021 compared to 2020. This is primarily attributable to an increase in
stock-based compensation of $57.6 million, labor cost of $15.0 million, outside
services of $4.4 million, insurance cost of $1.1 million and trade show cost of
$1.2 million, offset by the decrease in bonus cost of $12.1 million and
capitalization of research and development costs of $3.3 million. SG&A expenses
increased by 31.3% in 2020 compared to 2019. Such increase is primarily
attributable to increases in bonuses of $6.3 million, outside services of $5.9
million, labor costs of $5.9 million, and $0.6 million in legal fees, offset by
capitalization of research and development costs of $4.2 million.
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Other expenses of $0.9 million in 2021 was primarily for the settlement of outstanding litigation compared to other income of $13.8 million in 2020 primarily related to the gain on redemption of the public preferred stock upon the closing of our IPO in November 2020.



Interest expense decreased by 89.3% to $0.8 million for 2021 primarily due to
the repayment of a senior term loan held by EnCap (as defined under   Note 7   -
Debt Obligations), subordinated debt, and redemption of public preferred stock
upon the closing of our IPO in November 2020. Interest expense decreased by 2.8%
to $7.3 million for 2020 from $7.5 million for 2019, primarily due to decreases
in public preferred stock interest as a result of such stock redemption, and
interest on an equipment purchase arrangement, offset by an increase in interest
on the senior term loan with EnCap.

Components of interest expense are as follows:



                                                                   December 31,
                                                          2021          2020         2019
                                                              (amounts in thousands)

Commercial and subordinated note interest incurred $ 777 $ 3,875 $ 3,644 Preferred stock interest accrued

                            -           3,384        3,823
Total                                                 $   777         $ 7,259      $ 7,467


Income tax benefit was $28,000 for 2021, compared to $46,000 for 2020, primarily
due to an increase in state income taxes. Income tax benefit was $46,000 for
2020, compared to $104,000 for 2019, primarily attributable to administrative
practice release of certain FIN48 liability.

Segment Results



The accounting policies of each business segment are the same as those followed
by the Company as a whole. Management evaluates business segment performance
based on gross profit.

Security Solutions Segment:



                         Years Ended December 31,
                   2021            2020            2019
                      (dollar amounts in thousands)
Revenues       $ 123,534       $ 117,312       $ 101,923
Gross profit   $  64,904       $  50,458       $  42,056
Gross margin        52.5  %         43.0  %         41.3  %


Revenue increased by 5.3% in 2021 compared to 2020. This increase was driven by
higher sales of Telos ID and Information Assurance offerings. Revenue, excluding
the contract with the U.S. Census Bureau of $5.4 million in 2021 and $31.0
million in 2020, grew 36.9% year-over-year. Gross profit increased by 28.6% to
$64.9 million in 2021, with a reported gross margin of 52.5% for 2021. The
increase in profitability in 2021 was due to growth in high margin revenues
primarily in Telos ID.

Revenue increased by 15.1% in 2020 compared to 2019. The increase was driven
primarily by $8.1 million in sales of offerings in Telos ID on the contract with
the U.S. Census and $7.3 million in sales of offerings related to the contract
with the U.S. government agency for our Telos Ghost managed intelligence support
solution in Secure Communications. Gross profit increased by 20.0% to $50.5
million in 2020, with a reported gross margin of 43.0% in 2020 from 41.3% in
2019, due to various changes in the mix of various contracts.
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Secure Networks Segment:



                        Years Ended December 31,
                   2021            2020           2019
                      (dollar amounts in thousands)
Revenues       $  118,899       $ 62,605       $ 57,295
Gross profit   $   21,125       $ 11,962       $ 10,288
Gross margin         17.8  %        19.1  %        18.0  %

Revenue increased by 89.9% in 2021 compared to 2020. The increase resulted from various contracts with the DoD, primarily in our Secure Mobility Solution offerings. Gross profit increased by 76.6% to $21.1 million in 2021, with a reported gross margin of 17.8% in 2021 from 19.1% in 2020, due to various changes in the mix of contracts.



The revenue increased by 9.3% in 2020, compared to 2019, which was the result of
various DoD contracts, in both our Secure Mobility and Network Management /
Defense Enterprise Solutions offerings. Gross profit increase by 16.3% to $12.0
million in 2020, with a reported gross margin of 19.1% in 2020 from 18.0% in
2019, due to various changes in the mix of various contracts.

Balance Sheet Review

Assets



The Company's total assets as of December 31, 2021 and 2020 were $246.1 million
and $183.8 million, respectively. The increase in total assets was primarily
attributable to an increase in cash and cash equivalents provided by the
follow-on offering, an increase in accounts receivables due to higher revenue
generation, additional capital expenditures and an increase in intangible assets
and goodwill as a result of the acquisition of DFT during 2021.

Liabilities



The Company's total liabilities as of December 31, 2021 were $65.8 million
compared to $56.7 million in 2020. The increase in total liabilities was
primarily attributable to the increase in accounts payable and other accrued
liabilities as a result of the increase in the cost of sales as of December 31,
2021.

Equity

As of December 31, 2021, the Company had total equity of $180.3 million compared
to $127.1 million in 2020. The increase in equity is primarily driven by the
follow-on offering that raised $64.3 million and stock-based compensation of
$60.2 million, offset by the repurchase of the common stock and outstanding
warrants held by EnCap for $1.3 million and $26.9 million, respectively. The
Company reported a net loss of $43.1 million for the year ended December 31,
2021.

Non-GAAP Measures

In addition to our results determined in accordance with U.S. GAAP, we believe
the non-GAAP financial measures of Enterprise EBITDA, Adjusted EBITDA, Adjusted
Net Income (Loss), Adjusted Earnings Per Share ("EPS") and Free Cash Flow are
useful in evaluating our operating performance. We believe that this non-GAAP
financial information, when taken collectively with our GAAP results, may be
helpful to readers of our financial statements because it provides consistency
and comparability with past financial performance and assists in comparisons
with other companies, some of which use similar non-GAAP financial information
to supplement their GAAP results. The non-GAAP financial information is
presented for supplemental informational purposes only, should not be considered
a substitute for financial information presented in accordance with GAAP, and
may be different from similarly-titled non-GAAP measures used by other
companies. A reconciliation is provided below for each of these non-GAAP
financial measures to the most directly comparable financial measure stated in
accordance with GAAP.
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We use the following non-GAAP financial measures to understand and evaluate our
core operating performance and trends, to prepare and approve our annual budget,
to develop short-term and long-term operating plans, and to evaluate the
performance of certain management personnel when determining incentive
compensation. We believe these non-GAAP financial measures facilitate comparison
of our operating performance on a consistent basis between periods by excluding
certain items that may, or could, have a disproportionate positive or negative
impact on our results of operations in any particular period. When viewed in
combination with our results prepared in accordance with GAAP, these non-GAAP
financial measures help provide a broader picture of factors and trends
affecting our results of operations.

Enterprise EBITDA and Adjusted EBITDA



Both Enterprise EBITDA and Adjusted EBITDA are supplemental measures of
operating performance that are not made under GAAP and do not represent, and
should not be considered as, an alternative to net loss as determined by GAAP.
We define Enterprise EBITDA as net (loss) income attributable to Telos
Corporation, adjusted for net (loss) income attributable to non-controlling
interest, non-operating (income) expense, interest expense, provision for
(benefit from) income taxes, and depreciation and amortization. We define
Adjusted EBITDA as Enterprise EBITDA, adjusted for transaction
gains/losses/expenses related to our IPO and stock-based compensation expense.

A reconciliation of net loss attributable to Telos Corporation to Enterprise
EBITDA and Adjusted EBITDA, the most directly comparable GAAP measure, is as
follows:

Years Ended December 31,                                 2021           2020          2019
                                                               (amount in thousands)

Net (loss) income attributable to Telos Corporation $ (43,134) $ 1,687 $ (6,401) Net income attributable to non-controlling interest

           -         5,154         4,264
Non-operating expense (income)                              921           (20)         (201)
Interest expense                                            777         7,259         7,467
Benefit from income taxes                                   (28)          (46)         (104)
Depreciation and amortization                             5,624         5,353         4,972
Enterprise EBITDA                                       (35,840)       19,387         9,997
Transaction related gains/losses/expenses:
Transaction related legal and accounting                      -         1,914             -
Transaction related bonus                                     -         3,816             -
Gain on redemption of public preferred stock                  -       (14,012)            -
Transaction related non-operating income                      -          (274)            -
Loss on extinguishment of senior term loan                    -           138             -
Loss on extinguishment of subordinated debt                   -           411             -

Total transaction related gains/losses/expenses               -        (8,007)            -
Stock-based compensation expense                         60,231             4             -
Adjusted EBITDA                                       $  24,391      $ 11,384      $  9,997

Adjusted Net Income (Loss) and Adjusted EPS



Adjusted Net Income (Loss) and Adjusted EPS are supplemental measures of
operating performance that are not made under GAAP and do not represent, and
should not be considered as, alternatives to net income (loss) as determined by
GAAP. We define Adjusted Net Income (Loss) as net income (loss) attributable to
Telos Corporation, adjusted for non-operating expense (income),
transaction-related gains/losses/expenses, and stock-based compensation expense.
We define Adjusted EPS as Adjusted Net Income (Loss) divided by the
weighted-average number of common shares outstanding for the period.
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A reconciliation of net (loss) income attributable to Telos Corporation to
Adjusted Net Income (Loss) and Adjusted EPS, the most directly comparable GAAP
measure, is as follows:

Years Ended December 31,                         2021                                      2020                                       2019
                                                         Adjusted                                   Adjusted                                   Adjusted
                                   Adjusted Net        Earnings Per          Adjusted Net         Earnings Per          Adjusted Net         Earnings Per
                                  Income (Loss)            Share            Income (Loss)             Share            Income (Loss)             Share
                                  (in thousands)                            (in thousands)                             (in thousands)
Reported GAAP measure             $   (43,134)         $    (0.65)         $       1,687          $     0.04          $      (6,401)         $    (0.17)
Adjustments:
Non-operating expense (income)            921                0.01                    (20)                  -                   (201)

(0.01)


Transaction related gains/losses/
expenses                                    -                   -                 (8,007)              (0.19)                     -                   -
Stock-based compensation expense       60,231                0.91                      4                   -                      -                   -
Adjusted non-GAAP measure         $    18,018          $     0.27          $      (6,336)         $    (0.15)         $      (6,602)         $    (0.18)
Weighted-average shares of common
stock outstanding, diluted             66,374                                     42,877                                     37,729


Free Cash Flow

Free cash flow, as reconciled in the table below, is a non-GAAP financial
measure defined as net cash provided by or used in operating activities, less
purchases of property and equipment and capitalized software development costs.
This non-GAAP financial measure may be a useful measure for investors and other
users of our financial statements as a supplemental measure of our cash
performance and to assess the quality of our earnings as a key performance
measure in evaluating management.

Years Ended December 31,                     2021                     2020                    2019
                                                                (in

thousands)


Net cash flows provided by (used in)
operating activities                   $        7,262          $        (2,104)         $      11,816
Adjustments:
Purchases of property and equipment            (3,201)                    (780)                (4,090)
Capitalized software development costs         (9,968)                  (6,681)                (2,442)
Free cash flow                         $       (5,907)         $        (9,565)         $       5,284


Each of Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted
EPS and Free Cash Flow has limitations as an analytical tool, and you should not
consider any of them in isolation, or as a substitute for analysis of our
results as reported under GAAP. Among other limitations, each of Enterprise
EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS and Free Cash
Flow does not reflect our future requirements for capital expenditures or
contractual commitments, does not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of our ongoing
operations, and does not reflect income tax expense or benefit. Other companies
in our industry may calculate Adjusted EBITDA, Adjusted Net Income (Loss),
Adjusted EPS and Free Cash Flow differently than we do, which limits its
usefulness as a comparative measure. Because of these limitations, neither
Enterprise EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted EPS nor
Free Cash Flow should be considered as a replacement for net income (loss),
earnings per share or net cash flows provided by operating activities, as
determined by GAAP, or as a measure of our profitability. We compensate for
these limitations by relying primarily on our GAAP results and using non-GAAP
measures only for supplemental purposes.
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Liquidity and Capital Resources



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. For example, a
contractual requirement to post collateral for a duration of several months,
depending on the materiality of the amount, could have an immediate negative
effect on our liquidity, as such a circumstance would utilize cash resources
without a near-term cash inflow back to us. Likewise, the release of such
collateral could have a corresponding positive effect on our liquidity, as it
would represent an addition to our cash resources without any corresponding
near-term cash outflow. Similarly, a slow-down of payments from a customer,
group of customers or government payment office would not have an immediate and
direct effect on our availability unless the slowdown was material in amount and
over an extended period of time. Any of these examples would have an impact on
our cash resources and therefore our liquidity.

Upon the closing of the IPO in November 2020, we issued 17.2 million shares of
our common stock at a price of $17.00 per share, generating net proceeds of
approximately $272.8 million. We used approximately $108.9 million of the net
proceeds in connection with the exchangeable redeemable preferred stock
conversion (see   Note     8   - Exchangeable Redeemable Preferred Stock
Conversion), $30.0 million to fund our acquisition of the outstanding Class B
Units of Telos ID (see   Note     9   - Non-controlling Interests / Purchase of
Telos ID), and $21.0 million to repay our outstanding senior term loan and
subordinated debt (see   Note     7   - Debt Obligations).

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of
our common stock at a price of $33.00 per share, including 7.0 million shares of
common stock by certain existing stockholders of Telos. The offering generated
approximately $64.3 million of net proceeds to Telos. We did not receive any
proceeds from the shares of common stock sold by the selling stockholders. On
April 19, 2021, we used approximately $1.3 million of the net proceeds to
repurchase 39,682 shares of our common stock and $26.9 million to repurchase
warrants to purchase 900,970 shares of our common stock owned by EnCap (see Note
7 - Debt Obligations). Further, on July 30, 2021, we used approximately $5.9
million of the net proceeds to acquire the assets of DFT (see Note 4 -
Acquisition).

We intend to use the remaining net proceeds of the IPO and the follow-on
offering for general corporate purposes. We also may use a portion of the net
proceeds to acquire complementary businesses, products, services, or
technologies. The amounts and timing of our actual use of the net proceeds will
vary depending on numerous factors. Proceeds held by us are invested in
short-term investments until needed for the uses described above. We currently
anticipate that we will retain all available funds for use in the operations and
expansion of our business, and we do not anticipate paying any cash dividends on
our common stock in the foreseeable future.

Our overall financial position and liquidity are strong. Our working capital was
$140.8 million and $105.2 million as of December 31, 2021 and 2020,
respectively. Although no assurances can be given, we expect that funds
generated from operations are sufficient to maintain the liquidity we require to
meet our operating, investing and financing needs for the next 12 months.

We ended fiscal year 2021 with a cash and cash equivalent balance of $126.6
million compared to $106.0 million at the end of 2020. We place a strong
emphasis on cash flow generation. This focus gives us the flexibility for
capital deployment while preserving a strong balance sheet to position us for
future opportunities. We believe we have adequate funds on hand to execute our
financial and operating strategy.

The following is a discussion of our major operating, investing and financing activities in fiscal years 2021, 2020 and 2019, as classified on the Consolidated Statements of Cash Flows in Part II, Item 8.



Net cash provided by operating activities was $7.3 million in 2021 compared to
cash used in operating activities of $2.1 million in 2020 and cash provided by
operating activities of $11.8 million in 2019. 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. Additionally, cash used in
operating activities also includes dividends from preferred stock recorded as
interest expense of $3.4 million and $3.8 million for 2020 and 2019,
respectively. In 2021, net loss was $43.1 million, which included $60.2 million
of stock-based compensation, and $5.6 million of depreciation and amortization
($1.9 million of which was amortization of intangible assets). In 2020, net
income was $6.8 million, which included $14.0 million of gain related to the
redemption of public preferred stock, and $5.4 million of depreciation and
amortization ($1.7 million of which was amortization of intangible assets). In
2019, net loss was $2.1 million, which included $5.0 million of depreciation and
amortization ($1.8 million of which was amortization of intangible assets).
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Net cash used in investing activities for the years ended December 31, 2021,
2020, and 2019 was $19.1 million, $7.5 million, and $6.5 million, respectively.
Our investing activities include cash paid for capital expenditure and business
acquisition. Capital expenditures for the year ended December 31, 2021, 2020,
and 2019, consisted of the capitalization of software development costs of $10.0
million, $6.7 million, and $2.4 million, respectively, and the purchases of
property and equipment of $3.2 million, $0.8 million, and $4.1 million,
respectively. In 2021, we paid $5.9 million of cash for the acquisition
completed in July 2021.

Cash provided by financing activities for the years ended December 31, 2021,
2020 and 2019 was $32.3 million, $108.9 million, and $1.4 million, respectively.
The financing activities in 2021 is primarily attributable to the proceeds from
the follow-on offering that generated $64.3 million of net proceeds, reduced by
$26.9 million used to repurchase the outstanding warrants held by EnCap, $1.3
million to repurchase the common stock held by EnCap, repayments of $1.3 million
under finance leases, and $2.4 million final cash distribution to the Class B
Member of Telos ID. The financing activities in 2020 consisted of net proceeds
of $272.8 million from the initial public offering, offset by $108.9 million
redemption of the public preferred stock, $17.4 million payoff of senior term
loan, $30.0 million purchase of Telos ID membership interest, distributions of
$2.7 million to the Class B Member of Telos ID, $3.7 million payoff of
subordinated debt, and repayments of $1.2 million under finance leases. The
financing activities in 2019 consisted of net proceeds of $4.9 million from the
EnCap senior term loan, distributions of $2.4 million to the Class B Member of
Telos ID, and repayments of $1.1 million under finance leases.

Commitments



The Company does not have any other contractual obligations at December 31,
2021, except for the commitments on the existing lease obligations, as described
under   Note 1    8   - Commitments, Contingencies and Subsequent Events, to the
Consolidated Financial Statements. The following summarizes our obligations at
December 31, 2021 (in thousands):

                                                                                      Payments due by Period
                                           Total             2022             2023 - 2025           2026 - 2028          2029 and later

Finance lease obligations (1)           $ 17,267          $  2,149

$ 6,774 $ 7,295 $ 1,049 Operating lease obligations (2)

            1,003               602                   401                     -                       -
                                        $ 18,270          $  2,751

$ 7,175 $ 7,295 $ 1,049



(1) Includes interest expense           $  2,966          $    688          $      1,576          $        689          $           13


(2) Includes operating lease right-of-use obligations and short-term leases with
terms of 12 months or less. We have various lease agreements for property and
equipment that, pursuant to ASC 842, "Leases," require us to record the present
value of the minimum lease payments for such equipment and property.

In addition, there were no outstanding commitments that were considered material
for capital expenditures on December 31, 2021. We presently anticipate capital
expenditures of approximately $11.5 million in 2022; however, there can be no
assurance that this level of capital expenditures will occur. We believe that
the available cash will be sufficient to fund our projected capital expenditures
for 2022.

Critical Accounting Policies and Estimates



The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions in certain
circumstances that affect the amounts reported in the consolidated financial
statements. In preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the consolidated
financial statements, giving due consideration to materiality. Management
evaluates these estimates and assumptions on an ongoing basis. Our estimates and
assumptions have been prepared on the basis of the most current reasonably
available information, and may change in the future as more current information
is available. Management believes that our critical accounting policies are
those that are both material to the presentation of our financial condition and
results of operations and require management's most difficult, subjective and
complex judgments. Typically, the circumstances that make these judgments
difficult, subjective and complex have to do with making estimates about the
effect of matters that are inherently uncertain, as a result, actual results
could differ from those estimates.
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The following is a summary of the most critical accounting policies used and the
discussion is intended to bring to the attention of readers of those accounting
policies that management believes are critical in the preparation of our
consolidated financial statements and other financial disclosures. It is not
intended to be a comprehensive list of all significant accounting policies that
are more fully described in the notes to consolidated financial statements
contained within this report.

Revenue Recognition



We account for revenue in accordance with ASC Topic 606, "Revenue from Contracts
with Customers." The unit of account in ASC 606 is a performance obligation.
Timing of the satisfaction of performance obligations varies across our
businesses due to our diverse product and service mix, customer base, and
contractual terms. Significant judgment can be required in determining certain
performance obligations, and these determinations could change the amount of
revenue and profit recorded in a given period. Our contracts may have a single
performance obligation or multiple performance obligations. When there are
multiple performance obligations within a contract, we allocate the transaction
price, net of any discounts, to each performance obligation based on the
standalone selling price of the product or service underlying each performance
obligation. The standalone selling price is either based on estimated or actual
costs plus a reasonable profit margin or the observable price of a good or
service when Telos sells that good or service separately in similar
circumstances and to similar customers. The transaction price for our contracts
represents our best estimate of the consideration we will receive and includes
assumptions regarding variable consideration, as applicable. The transaction
price is allocated to each distinct performance obligation within the contract
and recognized as revenue when, or as, the performance obligation is satisfied.

Our contracts may also include various types of variable considerations such as
claims (i.e., indirect rate or other equitable adjustments) or incentive fees
and we include estimated amounts in the transaction price to the extent it is
probable that a significant reversal of cumulative revenue recognized will not
occur. The estimated amounts are based on an assessment of our anticipated
performance and all other information that is reasonably available to us.

For contracts where revenue is recognized over time, we recognized revenue based
on progress towards completion of the performance obligation, using costs
incurred to date relative to total estimated cost at completion to measure
progress on a proportional performance basis for our contracts. Due to the
nature of the work required to be performed on certain contracts, the estimation
of total revenue and cost at completion is complex, subject to many variables
and requires significant judgment. Contract estimates are based on various
assumptions, including labor and subcontractor costs, materials and other direct
costs and the complexity of the work to be performed. A significant change in
one or more of these estimates could affect the profitability of our contracts.
We review and update our contract-related estimates regularly and recognize
adjustments in estimated profit on contracts on a cumulative catch-up basis,
which may result in an adjustment increasing or decreasing revenue to date on a
contract in a particular period that the adjustment is identified. Revenue and
profit in future periods of contract performance are recognized using the
adjusted estimate.

For contracts where revenue is recognized over time, we recognized changes in
estimated contract revenues, costs and profits using the cumulative catch-up
method of accounting, wherein we recognize the cumulative effect of changes on
current and prior periods with the impact of the change from inception-to-date
recorded in the current period. In cases when the total expected costs exceed
total estimated revenue for a performance obligation, we recognize the
anticipated losses on contracts in full in the period in which the losses become
known. The impact of adjustments in contract estimates on our operating income
can be reflected in either revenue or operating costs and expenses. The
aggregate net changes in contract estimates increased our operating income by
$0.2 million in 2021.

Business Combinations

We accounted for the acquisition transaction in accordance with ASC 805,
"Business Combination". We recorded all tangible and intangible assets acquired
and liabilities assumed at fair value as of the acquisition date, which is
determined using the cost, market or income approach. The excess amount of the
aggregate purchase consideration paid over the fair value of the net assets
acquired and liabilities assumed is recorded as goodwill.

The preliminary valuations are based on the information that exists as of the
acquisition date and available to us. During the measurement period that shall
not exceed one year from the acquisition date, we may adjust the preliminary
purchase price allocation to reflect new information that we subsequently
obtained regarding facts and circumstances that existed as of the acquisition
date.
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Goodwill and Other Long-Lived Assets



We evaluate the impairment of goodwill and other long-lived assets in accordance
with ASC 350, "Intangibles - Goodwill and Other." Management annually reviews
goodwill and other long-lived assets for impairment or whenever events or
changes in circumstances indicate the carrying amount may not be recoverable. If
we determine that the carrying value of the goodwill and other long-lived assets
may not be recoverable, we will record an impairment charge for the amount by
which the carrying value of the goodwill and other long-lived assets exceeds its
fair value.

Goodwill is not amortized, but rather tested for potential impairment as of
December 31 each year. The goodwill impairment test is performed at the
reporting unit level. Accounting requirements provide that a reporting entity
may perform an optional qualitative assessment on an annual basis to determine
whether events occurred or circumstances changed that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. If an
initial qualitative assessment identifies that it is more likely than not that
the fair value of a reporting unit is less than its carrying amount, or the
optional qualitative assessment is not performed, a quantitative analysis is
performed. The Company performs the quantitative goodwill impairment test by
calculating the fair value of the reporting unit and comparing it to its
respective carrying value including goodwill. If the fair value is less than the
carrying value, the amount of impairment expense is equal to the difference
between the reporting unit's fair value and the reporting unit's carrying value.

We measure fair value based on a discounted cash flow method, which requires
management's judgment with respect to forecasted revenue, operating margins,
capital expenditures, and selection and use of an appropriate discount rate
commensurate with the risk inherent in each of our reporting units' current
business models. We utilized the weighted average cost of capital as derived by
certain assumptions specific to our facts and circumstances as the discount
rate. Our estimate of cash flows and discount rate are subject to change due to
the economic environment. In addition, the estimate of the total fair value of
our reporting units is compared to the market capitalization of the Company.

We amortized intangible assets over their respective estimated useful lives, and
reviewed them for impairment whenever events or changes in business
circumstances indicate the carrying value may not be recoverable. We completed
the required annual impairment test of goodwill for all reporting units and
other long-lived assets as of December 31, 2021, resulting in no impairments.
Based on our qualitative assessment, we concluded that it was
more-likely-than-not that the estimated value of the reporting units exceeded
its carrying value and thus, we did not proceed to the two-step goodwill
impairment test.

Income Taxes



We account for income taxes in accordance with ASC 740, "Income Taxes." Our
income tax expense, deferred tax assets and liabilities, and liabilities for
unrecognized tax benefits reflect our best estimate of current and future taxes
to be paid. We record net deferred assets to the extent we believe these assets
will more likely than not be realized. The realizability of net deferred tax
assets is based on all available evidence, including future taxable income
projections, tax planning strategies, and reversal of taxable temporary
differences. We regularly review our deferred tax assets for recoverability and
establish a valuation allowance when management believes it is more likely than
not such asset will not be recovered, taking into consideration historical
operating results, expectations of future earnings, tax planning strategies and
the expected timing of the reversals of existing temporary differences.

Recent Accounting Pronouncements



See   Note 1   - Overview and Summary of Significant Accounting Policies of the
consolidated financial statements for a discussion of recently issued accounting
pronouncements.

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