Telos Corporation (TLS) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Telos provides cybersecurity, cloud, identity, and secure networking solutions, primarily to U.S. government customers.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $50.2 million | $55.8 million |
| Gross profit / margin | $18.9 million / 37.6% | $14.5 million / 26.0% |
| Operating loss | $14.7 million | $13.5 million |
| Net loss | $15.0 million | $14.8 million |
| Net loss per diluted share | $0.22 | $0.23 |
| Operating cash flow | $0.2 million | ($6.9 million) |
| Free cash flow (non-GAAP) | ($3.1 million) | ($9.5 million) |
Cash and cash equivalents were $120.2 million at quarter-end, down from $126.6 million at December 31, 2021. Working capital was $132.7 million. Total liabilities were $69.0 million, including $14.0 million of finance lease obligations; the filing reports no other borrowings. Capital spending included $2.8 million of capitalized software development and $0.5 million of property and equipment purchases.
Stock-based compensation was $14.3 million, a significant non-cash expense. Adjusted EBITDA, a non-GAAP measure, was $1.0 million versus $1.5 million a year earlier.
Material changes versus Q1 2021
- Revenue fell 10.0%, mainly as certain Secure Networks projects wound down. Secure Networks revenue declined 29.4% to $23.2 million.
- Security Solutions revenue rose 17.9% to $26.9 million; its gross margin increased to 55.9% from 40.9%. Secure Networks gross margin edged up to 16.4% from 15.6%.
- Consolidated gross margin improved to 37.6%, reflecting contract mix and the winding down of lower-margin work. SG&A rose 20.2% to $33.6 million, including higher labor costs, contributing to a larger operating loss.
- Operating cash flow improved to positive $0.2 million, while investing and financing cash outflows were $3.3 million and $3.2 million, respectively. Cash declined by $6.3 million during the quarter.
Outlook, risks, and unusual items
- Management said cash on hand and expected operating cash generation should meet operating, investing, and financing needs for the next 12 months, while noting there can be no assurance.
- Funded backlog was $120.0 million at March 31, 2022, versus $123.5 million at year-end. Telos expected to recognize approximately 84% in 2022, 12% in 2023, and the balance thereafter. This is not a full-year revenue or earnings forecast.
- Management described the FY 2022 federal appropriations and proposed FY 2023 cybersecurity spending as potential demand drivers, but noted budget-process delays and uncertainty. Results remain exposed to U.S. government spending, contract timing, and program mix.
- Approximately 95% of quarterly revenue came from U.S. government contracts. DoD represented 71.4% of revenue; 72% of billed receivables were directly with U.S. government customers.
- A securities class-action lawsuit filed in February 2022 alleges failures to disclose delays in TSA and CMS contract launches and their effects on the company’s 2021 outlook. Damages sought are unspecified; Telos disputes the claims and intends to defend the case. Government contract audits or investigations could also result in penalties, repayment, or suspension or debarment.
- Disclosure controls were not effective at March 31, 2022 because previously identified material weaknesses in financial reporting controls remained unremediated. The weaknesses included entity-level controls and staffing, IT access and change controls, revenue recognition, software costs, stock compensation, financial close, and transaction coding. Management was working on remediation.
- The company reported no contract-loss provisions in either period. Q1 2021 included $1.1 million of other expense related to a litigation settlement, with no comparable charge in Q1 2022.
Important facts for investors to verify
- Progress on remediating material weaknesses and whether disclosure controls become effective.
- Delivery, renewal, and funding of backlog, particularly as Secure Networks projects wind down.
- Cash conversion and the trajectory of operating expenses, including substantial stock-based compensation.
- Developments in the securities lawsuit and any government contract audits or investigations.
- Actual contract concentration and collection trends, given the company’s reliance on federal customers.