Telos Corporation — FY2019 Form 10-K
Period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Telos provides cybersecurity, cloud-security and enterprise-security products and services, primarily to U.S. government customers.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $159.2 million | $138.0 million |
| Gross profit / margin | $52.3 million / 32.9% | $53.1 million / 38.4% |
| Operating income / margin | $5.0 million / 3.2% | $9.0 million / 6.5% |
| Consolidated net income (loss) | $(2.1) million | $1.7 million |
| Net loss attributable to Telos Corporation | $(6.4) million | $(1.6) million |
| Cash from operating activities | $11.8 million | $6.3 million |
| Cash and cash equivalents at year-end | $6.8 million | $0.1 million |
| Working capital at year-end | $2.9 million | $2.1 million |
- Revenue rose 15.4%, mainly from higher sales under the U.S. Air Force NETCENTS-2 contract. Services revenue increased 18.7% to $143.6 million; product revenue declined 8.2% to $15.6 million.
- Gross profit fell 1.4% despite revenue growth. Management attributed lower gross margin mainly to contract and business mix, including lower proprietary software sales. SG&A increased 7.4% to $47.3 million.
- Interest expense was $7.5 million, including $3.8 million of accrued dividends on the cumulative preferred stock. Cash used in investing activities was $6.5 million, including $2.4 million of capitalized software development and $4.1 million of property and equipment purchases.
Debt, liquidity and capital structure
- At year-end, the EnCap senior term loan had $16.0 million principal and a $16.3 million net carrying amount. Its maturity had been advanced to January 15, 2021; the loan is secured by substantially all company assets. Telos reported compliance with its financial covenants at December 31, 2019.
- Subordinated debt had a $2.9 million carrying value and matures July 25, 2022. Finance lease obligations totaled $16.9 million, including current amounts.
- The 12% cumulative public preferred stock was recorded as a $139.2 million noncurrent liability, including accumulated dividends and accretion. The company reported $107.4 million of accrued cash dividends and accrued $3.8 million in 2019. Redemption and dividend payments are restricted; the redemption timing is uncertain.
- Telos uses an accounts-receivable purchase agreement with RCA, with up to $10 million of eligible receivables subject to RCA’s discretion. The agreement was extended to June 30, 2022. Management expected operating cash and financing arrangements to cover needs for the next 12 months, but gave no assurance.
Backlog, outlook and notable items
- Total backlog was approximately $354.5 million, up from $290.8 million; funded backlog was $112.4 million, up from $79.3 million. Total backlog includes potential orders and options and is not assured revenue. The company expected to recognize 98.4% of funded remaining performance obligations in 2020.
- Management anticipated approximately $3.5 million of 2020 capital expenditures. No specific revenue or earnings guidance was provided.
- Telos disclosed a 10-year award for TSA PreCheck expansion enrollment services, with service launch anticipated in fall 2020.
- The filing describes COVID-19 effects on operations, customers, suppliers, government budgets and financing as uncertain and not quantifiable at the filing date. Management noted possible workforce disruption and adverse effects on 2020 sales, liquidity and results.
- Other central risks include heavy U.S. government dependence (93.7% of 2019 revenue), competitive rebidding and appropriations uncertainty, fixed-price contract cost overruns (82.7% of revenue), and reliance on continued access to financing. The company reported no goodwill impairment, but warned that lost contracts or missed growth expectations could trigger future impairment.
- A long-running preferred-stockholder lawsuit was dismissed by the trial court in December 2019; Costa Brava appealed in January 2020. Management said the outcome could not be reasonably determined. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
Investor facts to verify
- Whether NETCENTS-2 growth and funded backlog convert into revenue at expected margins, particularly given the 2019 gross-margin decline.
- Current liquidity, RCA receivable-purchase availability and EnCap covenant compliance, including the loan’s maturity and extension terms. A March 2020 amendment allowed quarterly extensions in exchange for additional exit fees.
- COVID-19’s realized impact on government demand, employee availability, suppliers, cash collections and 2020 performance.
- The status and potential consequences of the Costa Brava appeal and the substantial cumulative preferred-stock liability and payment restrictions.