Telos Corporation (Nasdaq: TLS) — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; the filing also presents fourth-quarter results. Telos provides cybersecurity, cloud, identity, secure communications and secure-networking products and services through its Security Solutions and Secure Networks segments. The U.S. federal government generated 95% of FY 2022 revenue.
Financial results and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $216.9 million | $242.4 million |
| Gross profit / margin | $79.0 million / 36.4% | $86.0 million / 35.5% |
| Operating loss | $53.9 million | $41.5 million |
| Net loss | $53.4 million | $43.1 million |
| Operating cash flow | $16.5 million | $7.3 million |
| Free cash flow (non-GAAP) | $11.2 million | $(5.9) million |
| Adjusted EBITDA (non-GAAP) | $19.5 million; 9.0% margin | $24.4 million; 10.1% margin |
Revenue declined 10.5% year over year. Cash and cash equivalents were $119.3 million and working capital was $122.5 million at year-end. The company had no borrowings on its new $30 million secured revolving facility; an additional $30 million expansion is uncommitted. Other financing obligations were $8.5 million, and finance lease obligations totaled $12.8 million. The filing reports no material capital-expenditure commitments.
FY 2022 GAAP stock-based compensation was $64.7 million, a substantial noncash expense. Adjusted EBITDA and free cash flow are non-GAAP measures; the company cautions they should not replace GAAP results.
Changes and segment performance
- Security Solutions revenue was $120.5 million, down 2.5%; gross margin fell to 51.4% from 52.5%, mainly due to the end of the Census program and program mix.
- Secure Networks revenue was $96.4 million, down 18.9%, reflecting program wind-downs and completions; gross margin was 17.7% versus 17.8%.
- SG&A increased 4.2% to $132.9 million, including $2.8 million of restructuring costs. Adjusted EBITDA fell about 20% despite higher operating cash flow, which management attributed mainly to favorable working-capital changes, particularly receivables.
- Funded backlog was $82.2 million versus $123.5 million a year earlier; total backlog was $212.0 million versus $246.4 million. Unfunded backlog depends on customer options and future funding.
For the fourth quarter, revenue was $47.3 million versus $64.1 million in Q4 2021, and net loss was $14.2 million versus $5.5 million. The quarterly data were revised for an immaterial stock-compensation accounting error.
Outlook, risks and unusual items
- Outlook: The filing provides no specific FY 2023 revenue or earnings guidance. Management anticipates a broader TSA PreCheck enrollment launch in calendar 2023, following a limited trial and subject to TSA validation. Management cited federal cybersecurity, cloud adoption and IT modernization priorities as opportunities, while noting the impact of continuing-resolution delays and federal procurement cycles.
- Customer and contract exposure: The Department of Defense accounted for 74% of revenue, and 82.9% of revenue came from firm-fixed-price contracts, exposing results to federal budgets, award delays, competition and cost overruns.
- Restructuring: A workforce reduction was announced in Q4 2022; most affected employees were expected to leave in early 2023. The company accrued approximately $2.8 million in related costs.
- Customer option and claim: After year-end, a customer declined to exercise the first option period on a delivery order tied to software licenses. The buyer of assigned payments notified Telos of its intent to pursue a claim against the customer, to be filed in Telos’ name if pursued.
- Legal proceedings: A securities class action concerning disclosures and forecasts was dismissed in February 2023; plaintiffs later sought leave to file an amended complaint, which the court permitted. The matter remains pending. Management said other known ordinary-course matters were not expected to materially affect results.
- Controls and reporting: Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to a material weakness in controls over accounting for forfeitures of non-standard equity awards. The issue caused immaterial errors in the first three 2022 quarters, which the company said it would revise in later filings. The company reported a remediation plan; prior disclosed control weaknesses were reported as remediated.
- Other key risks: Cybersecurity incidents, reliance on a small number of large contracts, employee retention and security-clearance needs, third-party hosting and suppliers, and government contract audits or termination rights.
Important facts for investors to verify
- Whether the TSA PreCheck trial was completed and the wider launch occurred as anticipated, and the resulting revenue contribution.
- Progress on replacing the material weakness and whether subsequent quarterly filings contain further revisions.
- The status and potential financial effect of the amended securities complaint and the delivery-order claim.
- Whether backlog converts to funded work and revenue, particularly after the decline in funded backlog.
- Whether cost reductions and new awards can stabilize revenue and improve adjusted margins, while assessing the large GAAP loss and stock-compensation adjustments.