Telos Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Telos provides IT solutions and services to U.S. government and commercial customers through Cyber Operations and Defense, Secure Communications, and Telos ID. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $28.0 | $30.1; down 7.0% |
| Gross profit / margin | $6.8 / 24.2% | $6.4 / 21.4% |
| Operating loss | $(1.7) | $(3.4) |
| Net loss, consolidated | $(2.4) | $(5.3) |
| Net loss attributable to Telos | $(2.7) | $(5.6) |
| Cash from operating activities | $3.3 | $8.6 |
| Cash and cash equivalents, March 31 | $0.043 | $0.032 at December 31, 2014 |
| Working capital | $2.0 | $4.2 at December 31, 2014 |
Services revenue was $25.3 million, down from $27.6 million; products revenue was $2.7 million, up from $2.5 million. SG&A fell 14.1% to $8.5 million. The income tax line was a $0.7 million benefit, versus a $0.5 million provision in Q1 2014. Cash used in investing was $0.1 million and cash used in financing was $3.2 million; cash increased by $11,000 during the quarter.
At March 31, total assets were $70.2 million, total liabilities $181.0 million, and total stockholders’ deficit $110.8 million. Borrowings under the Wells Fargo facility were $6.3 million, with $7.6 million of unused availability. The balance sheet also included $2.5 million of subordinated notes, $20.5 million of long-term capital lease obligations, and $123.0 million of redeemable preferred stock. The preferred stock carries cumulative dividends and is classified as noncurrent; its accumulated unpaid dividends and redemption terms are substantial.
Changes versus the prior comparable period
- Revenue declined primarily because of lower sales under the U.S. Air Force NETCENTS contract. Services sales fell across several solution areas; product sales rose, with a more favorable mix of identity-management products and proprietary software.
- Gross margin improved, chiefly because product gross margin rose to 46.6% from 10.1%; services gross margin slipped to 21.8% from 22.4%.
- Operating loss narrowed mainly due to lower SG&A, including lower accrued bonuses and legal costs. Net loss attributable to Telos also improved, reflecting the lower operating loss and a more favorable tax line.
- Operating cash flow decreased to $3.3 million from $8.6 million. Funded backlog fell to $61.5 million from $75.1 million a year earlier and $68.3 million at December 31, 2014.
Outlook, financing, and risks
- On April 3, 2015, after quarter-end, Telos reported selection for an award on the NETCENTS-2 replacement contract. The filing notes procurement delays and says some orders were placed through contract vehicles where Telos was not a prime awardee. The filing gives no specific revenue or earnings guidance.
- Management said existing borrowing capacity, together with proceeds from the Telos ID interest sale and Porter Notes, was expected to fund capital and liquidity needs for the foreseeable future, while noting that additional funding is not assured. Telos stated that its credit facility provides virtually all of its liquidity and that maintaining availability is critical.
- A March 31 amendment extended the Wells Fargo facility’s maturity to April 1, 2016, reduced its total commitment from $30 million to $20 million, set quarterly term-loan installments at $350,000, and established EBITDA and recurring-revenue covenants and a $1.25 million minimum excess-availability requirement. The lender waived certain existing defaults in connection with the amendment. The facility is secured by substantially all company assets.
- Porter-affiliated entities agreed to provide $5 million in unsecured subordinated notes at 12% interest, with $2.5 million received by quarter-end and the remaining tranche due no later than May 15, 2015. The notes mature July 1, 2017, are subordinated to the bank facility, and are a related-party financing arrangement.
- Government spending and funding uncertainty, contract timing and customer payment delays may affect revenue and liquidity. The filing reports no material Q1 change in previously disclosed risk factors. Two long-running preferred-stock-related legal matters remained pending; management said their outcomes could not be reasonably determined. Other ordinary-course litigation was not expected by management to have a material adverse effect.
- Telos reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Telos achieved the facility’s EBITDA and recurring-revenue covenants, retained the required excess availability, and maintained access to the reduced $20 million facility.
- Whether the second $2.5 million Porter Notes tranche was received by May 15, 2015, and the resulting interest and related-party obligations.
- NETCENTS-2 task-order awards, timing, funding, and conversion into revenue, given the lower backlog and historical contract delays.
- Cash conversion and working-capital movements, including collection timing, given the very low cash balance and lower operating cash flow year over year.
- The cumulative preferred dividends, redemption restrictions, and potential impact of the pending litigation on the company’s highly leveraged balance sheet and liquidity.