TELOS Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparison with the corresponding 2014 periods. Amounts below are in millions unless otherwise noted.
Business context and results
Telos provides IT solutions and services to U.S. government and commercial customers, primarily through Cyber Operations and Defense, Secure Communications, and Telos ID. It reports as one operating and reportable segment.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $32.0 | $29.0 | $60.0 | $59.2 |
| Gross profit / margin | $7.2 / 22.4% | $5.4 / 18.6% | $13.9 / 23.3% | $11.8 / 20.0% |
| Operating loss | $(1.1) | $(4.4) | $(2.8) | $(7.8) |
| Net loss attributable to Telos | $(2.4) | $(4.3) | $(5.2) | $(9.9) |
| Interest expense | $1.4 | $1.3 | $2.8 | $2.6 |
Q2 revenue rose 10.4%; first-half revenue rose 1.5%. First-half services revenue declined to $50.3 million from $51.8 million, while product revenue rose to $9.7 million from $7.3 million. Gross margin improved in both periods, reflecting solution mix, including higher-margin proprietary software sales. SG&A fell 15.2% in Q2 and 14.7% in the first half, primarily from lower accrued bonuses and legal costs. The company remained loss-making.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.6 million, down from $6.9 million; investing cash use was $0.2 million and financing cash use was $2.4 million. Cash increased by $6,000 to just $38,000.
- Working capital was $3.8 million, compared with $4.2 million at year-end 2014. Current assets were $31.1 million and current liabilities $27.3 million.
- Wells Fargo facility borrowings totaled $9.4 million at June 30, including $3.9 million of term debt. Unused availability was $4.6 million. The facility is secured by substantially all company assets and has financial covenants.
- The March 2015 amendment reduced the facility limit from $30 million to $20 million, reset covenants and required at least $1.25 million of excess availability. The stated facility rate was 5.5% at June 30, with a lower tier available following plan EBITDA achievement. The filing reports that Q2 achievement qualified for that pricing tier.
- Related-party Porter notes provided $2.5 million at 12% interest; the possible additional $2.5 million tranche had not been received by June 30, and timing was uncertain. The notes are subordinated, unsecured and due July 1, 2017.
- Capital lease obligations were $21.1 million. Total liabilities were $183.0 million, and stockholders’ deficit was $113.9 million. Redeemable preferred stock was reported at $124.0 million; its cumulative dividends and redemption restrictions are material to the capital structure.
Changes, outlook and risks
- Operating performance improved year over year, but funded backlog fell to $53.8 million from $64.4 million a year earlier and $68.3 million at December 31, 2014.
- Management cited delays in the NETCENTS-2 procurement and government funding constraints as factors affecting orders, revenue and margins. Telos was selected for the NETCENTS-2 replacement contract on April 3, 2015 after a reevaluation; the filing gives no revenue or earnings guidance.
- Management said existing borrowing capacity was sufficient for foreseeable capital and liquidity needs, while noting continued reliance on a credit facility and the possible need for additional capital. This assessment depends on borrowing-base availability, collections, covenants and access to funding; the second Porter tranche was uncertain.
- After quarter-end, on August 12, the facility maturity was extended to July 1, 2016. The company also disclosed prior covenant-default waivers and ongoing EBITDA, recurring-revenue and availability requirements.
- Public preferred stock carries a 12% cumulative dividend and senior redeemable preferred stock a 14.125% cumulative dividend. Dividends/redemptions are restricted, and the filing reports substantial accumulated arrears. The company disclosed no material changes to risk factors during the quarter.
- Long-running Costa Brava/Wynnefield and Hamot litigation remained pending, with no material quarterly developments. Management said the probability of plaintiffs’ success could not reasonably be determined in the former case.
Important facts for investors to verify
- Whether revenue, margins and funded backlog stabilize, particularly as NETCENTS-2 orders resume and government budgets evolve.
- Actual borrowing-base availability, covenant compliance and the effect of the July 2016 facility maturity; the filing states that continued facility access is central to liquidity.
- Whether the additional Porter-note funding becomes available and on what terms.
- The size and priority of preferred-stock obligations, unpaid cumulative dividends and restrictions on redemption or payment.
- Developments in the disclosed litigation and any resulting financial exposure; the filing does not provide a clear estimate of potential loss.