Telos Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Telos provides cybersecurity, cloud security, and enterprise security solutions, primarily to U.S. federal customers. It reports as one operating segment.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $39.0 million | $31.2 million |
| Gross profit / margin | $12.2 million / 31.4% | $9.0 million / 28.8% |
| Operating income (loss) | $0.4 million | $(1.4) million |
| Interest expense | $2.0 million | $1.8 million |
| Net loss | $(1.5) million | $(2.9) million |
| Net loss attributable to Telos | $(2.2) million | $(3.4) million |
| Cash from operating activities | $1.7 million | $4.0 million |
| Cash and cash equivalents | $6.4 million | $6.8 million at Dec. 31, 2019 |
| Working capital | $(14.8) million | $2.9 million at Dec. 31, 2019 |
Services revenue was $34.6 million and product revenue was $4.4 million. Federal customers generated $36.1 million, or most of total revenue. The company reported a 1.0% operating margin, compared with a 4.4% operating loss margin in Q1 2019; net loss attributable to Telos was 5.7% of revenue versus 10.9%.
At March 31, total assets were $77.3 million and total liabilities were $215.4 million, alongside $140.2 million of public preferred stock classified as a noncurrent liability and total stockholders’ deficit of $138.1 million. The EnCap senior term loan, net of discount and costs, was $16.5 million and classified as current; subordinated debt was $3.0 million. Finance lease obligations totaled $16.6 million. The public preferred stock carries a cumulative 12% annual dividend; $108.3 million of cash dividends had accrued as of March 31, and dividends have not been paid since 1991.
Funded backlog was $102.5 million at March 31, 2020, versus $84.6 million a year earlier and $112.4 million at year-end 2019. Total backlog was $334.0 million, versus $270.2 million a year earlier. Management expected to recognize approximately 94.4% of remaining performance obligations in 2020, 4.7% in 2021, and the balance thereafter.
Changes from the comparable period
- Revenue rose 25.1%, driven mainly by higher services sales in Telos ID Enterprise Solutions, Secure Communications Cyber and Enterprise Solutions, and Secure Mobility and Network Management/Defense Enterprise Solutions. Product revenue also increased, largely from Cyber & Cloud Solutions.
- Gross margin improved 2.6 percentage points. Services gross margin remained 28.0%; product gross margin rose to 57.6% from 36.1%, primarily due to a higher mix of proprietary software sales.
- SG&A increased 14.3% to $11.8 million, reflecting higher outside services and labor costs, partly offset by capitalization of software development costs.
- Operating results improved to income from a loss, but interest expense rose 14.6%. Operating cash flow declined to $1.7 million from $4.0 million.
Liquidity, outlook, risks, and unusual items
- Debt and liquidity: The EnCap loan carries a 13% accrual rate and was due January 15, 2021 unless extensions are elected. A March 2020 amendment allows four quarterly extensions, each increasing the exit fee by $250,000; all four would add $1.0 million. The company had not exercised an extension by the filing date. It reported compliance with financial covenants at March 31, based on agreed definitions of covenant inputs.
- Management liquidity view: Management expected EnCap and receivables-purchase arrangements, together with cash generated from operations, to provide sufficient liquidity for the next 12 months, but gave no assurance. The receivables purchaser may decline eligible receivables; loss of that arrangement or inability to refinance debt could materially harm liquidity. Management said it may curtail spending, seek bank financing, or consider equity financing.
- COVID-19: Telos continued operating as part of the defense industrial base, with remote-work and other mitigation measures. Management said first-quarter effects on results and liquidity were immaterial overall, although some programs were affected in the final two weeks. The future financial impact could not be reasonably estimated; potential effects include disruption to operations, supply chains, customers, sales, and margins.
- Government spending: The impact of pandemic-related federal spending and the FY2021 appropriations process remained uncertain. Continuing resolutions, a government shutdown, or changes to programs and procurement could affect contract timing and demand.
- Preferred stock and covenants: Financing documents restrict dividends and redemptions. The company has not met the preferred stock’s historical redemption schedule, but states the preferred stock is not payable on demand or callable for that failure and remains classified as noncurrent.
- Legal matters: Costa Brava voluntarily dismissed its appeal on May 12, 2020, concluding the long-running litigation after the quarter end. No material developments were reported in the Hamot/Siegel litigation; management said the outcome of any possible future indemnification claim could not be reasonably determined.
- No formal earnings guidance was provided. Management noted that quarterly results can vary with contract mix, deliverable timing, and government funding. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Investor facts to verify
- Whether Telos elected the EnCap maturity extensions, and the resulting maturity date, exit fee, covenant compliance, and refinancing plan.
- Whether operating cash generation and receivables-purchase availability remain sufficient, particularly given the working-capital deficit and $6.4 million cash balance.
- How Q1 revenue growth, backlog conversion, and improved product margins develop in subsequent quarters, including the timing and funding of government orders.
- The cumulative preferred-stock obligation, dividend accrual, and restrictions on payment or redemption.
- Any subsequent COVID-19, federal budget, litigation, or contract developments that materially change the risks described in this filing.