Telos Corporation (NASDAQ: TLS) — FY2021 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2021. Telos provides cybersecurity, cloud, identity, and secure-network solutions through its Security Solutions and Secure Networks segments. The company reorganized into these two reportable segments during Q4 2021; prior-period segment figures were recast. The U.S. government accounted for 96.1% of FY2021 revenue.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $242.4 million | $179.9 million |
| Gross profit / margin | $86.0 million / 35.5% | $62.4 million / 34.7% |
| Operating income (loss) | $(41.5) million / (17.1)% | $0.3 million / 0.2% |
| Net income (loss) attributable to Telos | $(43.1) million | $1.7 million |
| Adjusted EBITDA (non-GAAP) | $24.4 million | $11.4 million |
| Cash from operating activities | $7.3 million | $(2.1) million |
| Free cash flow (non-GAAP) | $(5.9) million | $(9.6) million |
| Cash and cash equivalents at year-end | $126.6 million | $106.0 million |
- Revenue rose 34.7%; excluding U.S. Census Bureau revenue of $5.4 million in 2021 versus $31.0 million in 2020, management reported growth of 59.2%.
- Security Solutions revenue was $123.5 million, up 5.3%; gross margin rose to 52.5% from 43.0%, primarily on higher-margin Telos ID revenue. Secure Networks revenue grew 89.9% to $118.9 million, while its gross margin declined to 17.8% from 19.1%.
- SG&A increased to $127.5 million, principally reflecting $60.2 million of stock-based compensation, alongside higher labor and other costs. The resulting GAAP operating loss contrasts with positive Adjusted EBITDA; the latter adds back stock compensation and other specified items.
- Working capital was $140.8 million, versus $105.2 million. Total assets were $246.1 million and total liabilities $65.8 million. The company reported $14.3 million of finance lease obligations and $1.0 million of operating lease obligations at year-end; its prior term loan and subordinated debt had been repaid in 2020.
Material changes and unusual items
- The 2021 follow-on offering provided $64.3 million net proceeds. Telos used $26.9 million to repurchase EnCap warrants, $1.3 million to repurchase common shares, and $5.9 million in cash toward the DFT acquisition, which added biometric technology and goodwill.
- Stock-based compensation rose sharply to $60.2 million from $4,000 in 2020. It is a substantial non-cash expense and an important driver of the gap between GAAP loss and adjusted measures.
- Total backlog declined to $246.4 million from $343.5 million, largely due to lower Secure Networks unfunded backlog. Funded backlog was $123.5 million versus $127.7 million; the company expected to recognize about 85.8% of remaining performance obligations in 2022.
- The company revised previously reported quarterly 2021 financial information for immaterial errors involving revenue timing/classification, expense classification, software capitalization, stock compensation, cash-flow classification, and acquisition valuation. It stated there was no cumulative effect on full-year 2021 results.
Liquidity, outlook, risks, and contingencies
- Management described liquidity as strong and said operating funds were expected to meet operating, investing, and financing needs for the next 12 months. Planned 2022 capital expenditures were approximately $11.5 million. The company did not anticipate cash dividends in the foreseeable future.
- The filing provides no specific numerical revenue or earnings guidance. Management cited federal cybersecurity priorities, cloud adoption, zero-trust initiatives, and continued remote work as potential demand drivers, while noting federal budget delays and spending changes could affect contract timing and awards.
- Contract concentration is material: the Department of Defense generated 74% of revenue and civilian federal customers 22%. Fixed-price contracts represented 87.6% of revenue, exposing margins to cost overruns. TSA PreCheck and CMS programs are important prospective revenue opportunities; CMS implementation had been indefinitely delayed, and TSA-related delays were also identified as a risk.
- Other principal risks include government funding and recompete uncertainty, lengthy sales cycles, dependence on key contracts and third-party cloud providers, cybersecurity threats, COVID-19 disruptions, and competition. Management reported no material government audit or investigation expected to have a material adverse effect, and no material legal-proceeding accrual at year-end.
- A securities class-action lawsuit filed in February 2022 alleges omissions concerning TSA and CMS contract delays and the company’s 2021 outlook. Telos disputes the allegations and intends to defend the case; claimed damages are unspecified.
- Management and the auditor identified material weaknesses in internal controls, including revenue recognition, software-cost accounting, stock compensation, business-combination valuation, financial close, IT controls, and the control environment. The auditor gave an adverse opinion on internal control effectiveness, while issuing an unqualified opinion on the financial statements. Management described remediation steps but gave no assurance on the timing of resolution.
Important facts for investors to verify
- Whether Telos remediates the material weaknesses and sustains reliable quarterly reporting and controls.
- Current timing, funding, and revenue contribution of TSA PreCheck and CMS programs, and the implications of the related litigation.
- Backlog conversion and renewal rates, especially the decline in unfunded backlog and the amount of government work actually funded.
- Whether revenue growth can translate into GAAP profitability and positive free cash flow as stock-based compensation, software investment, and operating costs evolve.
- Exposure to federal customer concentration and fixed-price contract cost overruns, alongside continued reliance on third-party cloud infrastructure.