Telos Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Telos provides cybersecurity, cloud, identity, and secure networking solutions, primarily to U.S. government customers. The company described 2023 as a transition year focused on streamlining operations and rebuilding revenue through new business wins.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $35.2 million | $50.2 million | Down 29.8% |
| Gross profit / margin | $13.5 million / 38.3% | $18.9 million / 37.6% | Margin up 0.7 percentage points |
| Operating loss | $13.0 million | $16.4 million | Loss narrowed |
| Net loss | $10.7 million | $16.6 million | Loss narrowed |
| Diluted loss per share | $0.16 | $0.25 | Improved |
| Adjusted EBITDA (non-GAAP) | $(0.8) million | $1.0 million | Declined |
| Free cash flow (non-GAAP) | $(4.1) million | $(3.1) million | Use increased |
Service revenue declined to $31.5 million from $48.1 million; product revenue increased to $3.7 million from $2.1 million. Federal customers accounted for 94% of revenue. Security Solutions revenue fell 26.5%, with segment margin contracting to 52.0% from 55.9%. Secure Networks revenue fell 33.5%, while segment margin improved to 20.8% from 16.4%.
Selling, general and administrative expense decreased 24.9% to $26.5 million, largely reflecting lower stock-based compensation and labor costs, partly offset by restructuring charges. Despite lower GAAP net loss, adjusted EBITDA fell from positive $1.0 million to negative $0.8 million, reflecting the lower operating scale and the adjustments used in the company’s non-GAAP calculation.
Cash, liquidity, and obligations
- Cash and cash equivalents were $112.5 million at March 31, 2023, down from $119.3 million at December 31, 2022. Working capital was $116.5 million.
- Operating cash flow was negative $0.1 million. Investing cash use was $4.6 million, including $3.8 million of capitalized software development; financing cash use was $2.2 million. Cash, cash equivalents, and restricted cash declined $6.8 million during the quarter.
- The company reported no borrowings under its $30 million senior secured revolving facility, which matures in December 2025 and includes an uncommitted option for up to $30 million of additional capacity. It was in compliance with the facility’s covenants at quarter-end.
- Finance lease obligations totaled approximately $12.5 million, current and non-current combined. No other financing obligations remained at quarter-end after the company extinguished them using software licenses.
- Funded backlog, described as remaining performance obligations, was approximately $77.4 million. Telos expects to recognize about 70% in 2023 and 29% in 2024.
Outlook, risks, and notable items
- Management cited the wind-down or completion of programs and lower-than-expected new business wins in 2022 as drivers of the revenue decline. Priorities for 2023 include reorganizing business development, adding talent, expanding strategic partnerships, and improving the opportunity portfolio. The filing provides no specific revenue or earnings guidance.
- The company expects restructuring-plan costs of approximately $4.0 million, revised upward from $2.8 million estimated at year-end 2022. It recorded $1.2 million of restructuring charges in Q1 and reported a $2.3 million accrual at quarter-end.
- Other income included a $1.4 million gain from extinguishing financing obligations and increased dividend income from money market placements. The gain was non-recurring in the comparable period.
- Telos identified potential goodwill and intangible-asset impairment as a risk. The stock price fell below book value per share during Q1; if it remains below that level or other adverse indicators arise, an interim impairment analysis may be required. No impairment was recorded in the quarter.
- Federal budget uncertainty, continuing resolutions, shutdowns, award delays, and changes in government priorities could affect revenue and cash flow. Government customers represented 94% of Q1 revenue, and 95% of billed and unbilled receivables were with U.S. government customers.
- A securities class action was dismissed in February 2023, but plaintiffs were permitted to amend their complaint. They filed an amended complaint in March, and Telos moved to dismiss it on April 14, 2023. The company stated it did not believe the proceedings would materially adversely affect the business or financial statements.
- The filing revised Q1 2022 results to correct a $1.6 million understatement of stock-based compensation expense and net loss. The company said the error was not material to the previously issued interim statements and had no net cash-flow impact. It reported that the related internal-control material weakness had been remediated as of March 31, 2023; disclosure controls were deemed effective.
Key facts for investors to verify
- Whether the $77.4 million funded backlog converts to revenue on the expected schedule, and whether new contract wins offset program wind-downs.
- Whether revenue stabilization and operating cost reductions improve GAAP results and adjusted EBITDA without relying on non-recurring gains or non-GAAP add-backs.
- Cash burn, software-development spending, and the availability and covenant terms of the undrawn revolving facility.
- Whether sustained share-price weakness or operating performance leads to a goodwill or intangible-asset impairment charge.
- The status and potential financial impact of the amended securities litigation and any government-contract audits or investigations.
- Whether the remediated equity-award accounting controls continue to operate effectively after the prior-period revision.