TELOS CORP (TLSRP) - Form 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for the period ended June 30, 2007. The financial statements are unaudited and not reviewed by an independent public accountant. The Company's independent auditor, Goodman & Company, LLP, resigned effective July 24, 2007, and the Company has been unable to retain a successor. The Company operates in two segments: Managed Solutions (government IT integration) and Xacta (secure enterprise solutions). The Company is currently delisted from the OTCBB and trades on the Pink Sheets.
Key Financial Metrics (Six Months Ended June 30, 2007)
| Metric | Value (in thousands) |
|---|---|
| Total Revenue | $101,610 |
| Net Income | $9,535 |
| Operating Income | $7,920 |
| Gross Margin | 23.9% |
| Cash and Cash Equivalents | $14 |
| Working Capital Deficit | ($3,137) |
| Total Debt & Preferred Stock (Liabilities) | $122,800 |
| Unused Credit Facility Availability | $7,400 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 66.6% to $101.6 million from $61.0 million in the prior year period. This was driven by a $26.7 million increase in Managed Solutions (ARISS contract) and a $14.0 million increase in Xacta (NETCENTS contract).
- Profitability Turnaround: The Company reported a Net Income of $9.5 million compared to a Net Loss of $22.0 million in the prior year. This improvement is largely due to a $5.8 million gain from the sale of a 40% membership interest in TIMS LLC and a significant reduction in interest expense.
- Interest Expense Reduction: Interest expense decreased by $11.9 million year-over-year, primarily due to the absence of a $9.9 million accounting adjustment related to preferred stock dividend accruals that occurred in Q2 2006.
- Cash Flow: Operating cash flow was negative $6.5 million, compared to positive $1.5 million in the prior year. Investing activities provided $5.6 million due to the TIMS LLC sale.
Outlook, Risks, and Contingencies
- Going Concern & Liquidity: The Company has a working capital deficit of $3.1 million. While management believes current cash and credit facility availability are sufficient for 2007, there is no assurance of continued ability to mitigate working capital constraints.
- Legal Proceedings: The Company is involved in significant litigation with holders of its Public Preferred Stock (Costa Brava Partnership III, L.P. and Wynnefield). Plaintiffs allege failure to pay mandatory dividends and seek receivership or dissolution. The Company denies these claims. Unreimbursed legal expenses totaled $4.0 million for the six months ended June 30, 2007, with $7.7 million unpaid as of the period end.
- Accounting Firm Resignation: The resignation of the independent auditor creates a risk of default under the credit facility if a successor cannot be retained to file timely reports.
- Debt Covenants: The Company is currently in compliance with its Senior Credit Facility covenants (EBITDA), but the facility prohibits stock redemptions and dividends until October 21, 2008.
- Preferred Stock: The Company has not paid dividends on its Public Preferred Stock since 1991. Accrued dividends and accretion on preferred stock classified as liabilities total approximately $99.7 million.
Investor Verification Checklist
- Verify the status of the search for a new independent public accountant and the potential impact on future filing deadlines.
- Confirm the current status of the Costa Brava litigation and any potential financial impact from a receivership or settlement.
- Review the Company's ability to maintain EBITDA compliance with the Wells Fargo Foothill credit facility given the high level of legal expenses.
- Assess the sustainability of revenue growth from the ARISS and NETCENTS government contracts.
- Monitor the Company's cash position, which stood at only $14,000 as of June 30, 2007.