TELOS CORP annual report, FY2014

Telos Corporation — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited quarterly data; this is an annual report, not a standalone fourth-quarter filing. Telos provides secure IT solutions and services, primarily to U.S. government customers.

Financial performance

Metric20142013
Revenue$127.6 million$207.4 million
Gross profit / margin$25.0 million / 19.6%$38.6 million / 18.6%
Operating income (loss)($11.6 million)$6.1 million
Net income (loss)($10.6 million)($0.8 million)
Net income (loss) attributable to Telos($12.3 million)($2.6 million)
Cash from operating activities$6.2 million$4.8 million

Revenue fell 38.5%. Services revenue was $103.1 million and product revenue was $24.5 million. Federal customers accounted for 96.1% of revenue. Gross margin improved by 1.0 percentage point, but higher SG&A—up 12.6% to $36.6 million—and lower sales contributed to the operating loss. The 2014 income tax benefit was $6.0 million.

Fourth-quarter revenue was $29.9 million versus $55.3 million in fourth-quarter 2013. Telos-attributable net loss was $1.6 million versus a $5.8 million loss in the prior-year quarter.

Financial position and liquidity

  • At year-end, cash was $32,000, working capital was $4.2 million (down from $17.3 million), and total assets were $73.8 million.
  • Revolving-facility borrowings were $10.9 million, including $2.3 million classified as short-term; unused availability was $4.9 million. The facility was secured by substantially all company assets.
  • Capital-lease obligations were $21.5 million net present value. Total stockholders’ deficit was $108.5 million.
  • Redeemable preferred stock carried a combined balance of approximately $122.1 million, including $120.1 million of 12% public preferred stock and $2.0 million of senior preferred stock. Preferred dividends accrued as interest expense totaled $3.9 million in 2014.
  • Operating cash flow was positive despite the net loss; it included a substantial benefit from lower accounts receivable. Investing activities used $0.7 million and financing activities used $5.6 million.

Changes, outlook, and material items

  • The revenue decline was driven chiefly by reduced U.S. Air Force NETCENTS contract activity. Telos was selected for a NETCENTS-2 award in March 2014, but procurement protests delayed orders; the government was evaluating proposals and the GAO had recommended a new source-selection decision. Telos said no protest had been filed against its own award.
  • In December 2014, Telos sold a further 10% of Telos ID for $5 million, retaining 50% ownership and control through board representation. It received $3 million by year-end and the remaining $2 million in January 2015.
  • After year-end, affiliated entities of a significant shareholder agreed to provide $5 million of subordinated notes at 12% interest. A March 31, 2015 facility amendment extended maturity to April 1, 2016, reduced the credit limit from $30 million to $20 million, and added EBITDA, recurring-revenue, and minimum-availability covenants. Management said the facility and additional funding were expected to meet needs for the foreseeable future; it also acknowledged further capital might be needed.
  • Management anticipated approximately $1.8 million of 2015 capital expenditures. No quantified revenue or earnings guidance was provided.
  • A contract loss estimate and a $1.4 million inventory-obsolescence charge were recorded in 2014. Goodwill and intangible-asset impairment charges were not recorded.
  • Two long-running shareholder/director lawsuits remained pending. Management said their outcomes could not be reasonably determined; it reported no material adverse effect expected from other ordinary-course litigation.

Principal risks and investor verification

Key risks include dependence on U.S. government spending and appropriations, contract funding or termination, NETCENTS-2 delays, fixed-price cost overruns, competition, reliance on key suppliers and cleared personnel, cybersecurity threats, and dependence on the asset-based credit facility. The filing also describes continuing preferred-stock dividend and redemption restrictions, substantial negative equity, and litigation uncertainty.

  • Verify the status of NETCENTS-2 protests, task-order awards, and replacement revenue for declining NETCENTS work.
  • Check actual borrowing availability, covenant compliance, and repayment/refinancing plans under the amended facility, including the subordinated notes.
  • Review the terms, accrued balances, and potential future treatment of the $122.1 million preferred-stock obligations and related dividend accruals.
  • Track working-capital trends, collections, inventory reserves, and whether operating cash flow remains positive as revenue changes.
  • Follow developments and any reserve updates in the Costa Brava/Wynnefield and Hamot litigation.
  • Confirm the facility interest-rate disclosures: the filing reports a 4.25% year-end rate and gives differing 2014 weighted-average rates in separate sections (5.6% and 5.3%).