Telos Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are with the three months ended March 31, 2023 unless otherwise noted. Telos provides cybersecurity, cloud, identity, and secure networking solutions, primarily to U.S. government customers.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $29.6 million | $35.2 million |
| Gross profit / margin | $11.0 million / 37.0% | $13.5 million / 38.3% |
| Operating loss | $8.4 million | $13.0 million |
| Net loss / diluted loss per share | $7.4 million / $0.10 | $10.7 million / $0.16 |
| Adjusted EBITDA (non-GAAP) | $(2.3) million | $(0.8) million |
| Cash used in operating activities | $0.35 million | $0.10 million |
| Free cash flow (non-GAAP) | $(3.6) million | $(4.1) million |
Revenue fell 15.9%. Services revenue was $28.9 million and products revenue was $0.8 million. Gross margin declined mainly because of higher amortization of capitalized software development costs. SG&A decreased 31.3% to $16.2 million, principally reflecting $6.1 million less stock-based compensation and the absence of $1.2 million of prior-year restructuring expense. Despite the lower GAAP net loss, adjusted net loss increased to $5.7 million from $2.5 million, largely because Q1 2023 included a $1.4 million gain on extinguishment of financing obligations.
Cash and cash equivalents were $93.9 million at quarter-end, down from $99.3 million at December 31, 2023; working capital was $92.7 million. Total assets were $195.4 million and total liabilities were $41.0 million. The company reported no borrowings under its $30 million revolving credit facility, which matures December 30, 2025; finance lease obligations totaled approximately $10.8 million. Management said cash and available credit should be sufficient for the next 12 months. Cash used in investing activities was $4.1 million, including capitalized software development costs of $3.2 million; financing activities used $0.8 million.
Material changes and business developments
- Secure Networks: Revenue fell 28.9% to $11.0 million, primarily as several programs ramped down. Gross margin improved to 21.3% from 20.8%, but gross profit declined to $2.3 million.
- Security Solutions: Revenue declined 5.7% to $18.6 million as lower volume on existing programs more than offset TSA PreCheck growth. Gross margin fell to 46.3% from 52.0%, mainly due to software amortization.
- Federal customers represented 90% of revenue; the Department of Defense represented 56%, down from 68% a year earlier. Funded backlog, described as remaining performance obligations, was approximately $36.1 million; Telos expects to recognize about 89% over the next 12 months.
- The company invested $3.0 million in a privately held company through a simple agreement for future equity. It paid $0.9 million in March, with the remainder paid in April.
- Cash, cash equivalents, and restricted cash declined by $5.3 million during the quarter. Accounts receivable declined to $18.7 million from $30.4 million at year-end, while accounts payable and accrued liabilities also decreased.
Outlook, risks, and contingencies
The filing provides no quantified company revenue or earnings guidance. Management said 2023 transition efforts were beginning to produce new business wins, with priorities including executing significant wins with prime partners, expanding TSA PreCheck enrollment sites, and building the business-development pipeline. Execution of significant wins is subject to favorable outcomes in ongoing protests.
Management noted that FY2024 federal appropriations were completed in late March, but considered it likely that the federal government would begin FY2025 under a continuing resolution because of uncertainty around reaching an appropriations agreement. Telos also cited the potential effect of federal spending decisions on its business. Its concentration in government contracting exposes it to program ramp-downs, award protests, payment timing, audits, and potential suspension or debarment. Government customers accounted for 96% of billed and unbilled receivables at quarter-end. Management said known legal matters were not expected to have a material adverse effect; government-contract audits and investigations could nevertheless result in penalties or restrictions. No material changes to previously disclosed risk factors were reported.
The $30 million revolving facility is secured by substantially all company assets and includes a maximum 3-to-1 senior leverage covenant; Telos reported compliance at March 31, 2024. The company recorded an immaterial contract loss in the quarter. It reported no goodwill impairment and no material legal proceedings.
Important facts for investors to verify
- Whether protested awards are resolved favorably and whether anticipated new wins convert into revenue on schedule.
- Whether Secure Networks program run-offs stabilize and TSA PreCheck growth offsets declines elsewhere.
- Whether software development amortization continues to pressure GAAP gross margin and whether operating cash flow improves.
- How federal FY2025 appropriations and continuing-resolution conditions affect contract awards, funding, and customer payment timing.
- The terms, valuation, and potential impact of the $3.0 million private-company investment, including the amount paid after quarter-end.
- Progress against the $36.1 million funded backlog and the pace at which it converts to recognized revenue.