Telos Corporation (NASDAQ:TLS) Q4 2023 Earnings Conference Call March 15, 2024 8:30 PM ET Company Participants Allison Phillipp - Director-Corporate Communications\ Mark Bendza - Executive Vice President & Chief Financial Officer John Wood - Chairman & Chief Executive Officer Mark Griffin - Executive Vice President, Security Solutions Conference Call Participants Zach Cummins - B. Riley Securities. Rudy Kessinger - D.A. Davidson Alex Henderson - Needham Nehal Chokshi - Northland Capital Markets Operator Goo ...

Telos Corporation Announces Substantial Progress on New Business Capture; Reports Fourth Quarter and Full Year 2023 Results Above Expectations Ashburn, Virginia, March 15, 2024 – Telos Corporation (NASDAQ: TLS), a leading provider of cyber, cloud and enterprise security solutions for the world's most security-conscious organizations, today announced financial results for the fourth quarter 2023. "I am pleased to announce that Telos' prime partners have received awards on new programs that are worth up to $5 ...

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements reflect a significant revenue decline and persistent net losses for the third quarter and first nine months of 2023, alongside a reduction in total assets and negative operating cash flow [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) The company experienced a substantial revenue decrease and a slightly wider net loss in Q3 2023 compared to the prior year, with year-to-date figures showing a similar revenue decline but a narrower net loss Consolidated Statements of Operations (Unaudited) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$36,186** | **$63,593** | **$104,319** | **$169,544** | | Gross Profit | $13,013 | $20,945 | $38,854 | $60,745 | | Operating Loss | $(9,693) | $(8,784) | $(32,130) | $(39,187) | | **Net Loss** | **$(8,672)** | **$(8,455)** | **$(27,442)** | **$(39,230)** | | Diluted Loss Per Share | $(0.12) | $(0.13) | $(0.40) | $(0.58) | [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) The balance sheet as of September 30, 2023, shows a contraction in total assets, driven by lower cash and receivables, accompanied by a reduction in total liabilities and a slight decrease in stockholders' equity Consolidated Balance Sheet Highlights (Unaudited) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $99,953 | $119,305 | | Accounts receivable, net | $25,424 | $40,069 | | **Total Assets** | **$204,738** | **$237,397** | | Total current liabilities | $29,583 | $45,502 | | **Total Liabilities** | **$40,717** | **$65,043** | | **Total Stockholders' Equity** | **$164,021** | **$172,354** | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the first nine months of 2023, the company's cash flow from operations turned negative, contrasting sharply with the cash provided in the same period of 2022, while cash used in investing activities increased Consolidated Cash Flow Summary (Unaudited) | Metric | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(3,367) | $20,118 | | Net cash used in investing activities | $(12,310) | $(9,395) | | Net cash used in financing activities | $(3,673) | $(11,821) | | **Net change in cash, cash equivalents, and restricted cash** | **$(19,350)** | **$(1,098)** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes to the financials detail revenue recognition policies, segment performance, customer concentration, and a significant revision of prior-year statements due to an accounting error in stock-based compensation - The company operates as a provider of cyber, cloud, and enterprise security solutions through its subsidiaries, including Xacta Corporation and Telos Identity Management Solutions, LLC[19](index=19&type=chunk) - In Q4 2022, the company initiated a restructuring plan to align its cost structure with business volume, with the total expected cost updated to **$4.0 million** in early 2023[31](index=31&type=chunk)[32](index=32&type=chunk) - The majority of revenue (**89% for YTD 2023**) is recognized over time as services are delivered to customers[37](index=37&type=chunk) Revenue by Customer Type (YTD 2023 vs YTD 2022) | Customer Type | YTD 2023 Revenue (in thousands) | YTD 2022 Revenue (in thousands) | YTD 2023 % of Total | YTD 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | Federal | $93,456 | $160,351 | 90% | 95% | | State & local, and commercial | $10,863 | $9,193 | 10% | 5% | | **Total Revenue** | **$104,319** | **$169,544** | **100%** | **100%** | - The U.S. Department of Defense (DoD) is a major customer, accounting for **65% of total revenue** for the nine months ended September 30, 2023[45](index=45&type=chunk) - As of September 30, 2023, the company had approximately **$79.0 million of remaining performance obligations** (funded backlog), with 84% expected to be recognized as revenue over the next 12 months[47](index=47&type=chunk) - A prior-period error was identified where stock-based compensation expense was erroneously reversed, understating the net loss for the nine months ended September 30, 2022, by **$4.6 million**[97](index=97&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant revenue decline due to program completions, improved gross margins from a favorable revenue mix, and a focus on rebuilding the revenue base amid federal budget uncertainty [General and Business Overview](index=21&type=section&id=General%20and%20Business%20Overview) Telos provides advanced security solutions primarily to the U.S. federal government and is focused on streamlining operations and growing its revenue base in a transitional 2023 fiscal year - The company's primary customers include the U.S. federal government, large commercial businesses, and state and local governments[104](index=104&type=chunk) - 2023 business development priorities include reorganizing resources, adding new talent, maximizing strategic partnerships, and increasing the quality of contract vehicles[107](index=107&type=chunk) [Business Environment](index=21&type=section&id=Business%20Environment) The company's operating environment is shaped by U.S. federal budget uncertainties, though demand is supported by persistent cybersecurity threats and evolving regulatory requirements - Uncertainty in the U.S. federal budget, including the use of Continuing Resolutions (CRs) and the risk of a government shutdown, could impact federal customers' ability to move forward on planned expenditures in FY2024[108](index=108&type=chunk) - Key cybersecurity trends driving demand include rising ransomware threats, risks to critical infrastructure, the complexity of regulatory compliance, and the need for identity assurance[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk)[113](index=113&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Third-quarter results show a sharp revenue decline due to program completions, partially offset by an improved consolidated gross margin and lower operating expenses from restructuring efforts - The decline in Q3 revenue was attributed to the completion of certain programs and lower revenue on ongoing major programs[123](index=123&type=chunk) - SG&A expenses **decreased by $7.0 million (23.6%)** in Q3 2023 compared to Q3 2022, primarily driven by lower compensation costs across all departments[120](index=120&type=chunk) Security Solutions Segment Results (Q3 2023 vs Q3 2022) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $19,795 | $32,440 | -39.0% | | Gross Profit | $9,354 | $15,577 | -39.9% | | Gross Margin | 47.3% | 48.0% | -0.7 p.p. | Secure Networks Segment Results (Q3 2023 vs Q3 2022) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $16,391 | $31,153 | -47.4% | | Gross Profit | $3,659 | $5,368 | -31.8% | | Gross Margin | 22.3% | 17.2% | +5.1 p.p. | [Non-GAAP Financial Measures](index=25&type=section&id=Non-GAAP%20Financial%20Measures) Non-GAAP metrics reveal a significant deterioration in profitability, with Adjusted EBITDA turning negative in Q3 and year-to-date 2023 compared to positive results in the prior-year periods Reconciliation of Net Loss to Adjusted EBITDA (Non-GAAP) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(8,672) | $(8,455) | $(27,442) | $(39,230) | | EBITDA (Non-GAAP) | $(6,478) | $(7,267) | $(25,794) | $(34,760) | | **Adjusted EBITDA (Non-GAAP)** | **$(1,260)** | **$8,569** | **$(2,135)** | **$14,083** | Free Cash Flow (Non-GAAP) | Metric | Q3 2023 (in thousands) | Q3 2022 (in thousands) | YTD 2023 (in thousands) | YTD 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $846 | $11,986 | $(3,367) | $20,118 | | **Free cash flow (Non-GAAP)** | **$(2,996)** | **$8,366** | **$(15,677)** | **$10,723** | [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a solid liquidity position with substantial cash reserves and working capital, which management deems sufficient for near-term needs despite negative operating cash flow year-to-date - As of September 30, 2023, the company had cash and cash equivalents of **$100.0 million** and working capital of **$106.6 million**[151](index=151&type=chunk) - Primary sources of liquidity are cash on hand, future operating cash flows, and a **$30.0 million revolving credit facility**[150](index=150&type=chunk) - Net cash used in operating activities for the first nine months of 2023 was **$3.4 million**, a **$23.5 million decrease** from the cash provided in the same period of 2022[153](index=153&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company provided no quantitative and qualitative disclosures concerning market risk for the reporting period - No disclosures were made under this item[157](index=157&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective, and no material changes were made to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023[159](index=159&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[160](index=160&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) A securities class action lawsuit previously filed against the company was dismissed with prejudice, and the matter is now considered final - A securities lawsuit filed in February 2022 against the company, alleging violations related to disclosures about contracts, was **dismissed with prejudice on June 21, 2023**[92](index=92&type=chunk) - The dismissal of the lawsuit is final as no appeal was taken[92](index=92&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks of a material goodwill impairment charge due to its low stock price and potential adverse impacts on revenue from federal budget uncertainties - A key risk is the potential for a material impairment charge on goodwill (**$17.9 million** as of Sep 30, 2023) and other intangible assets, as the company's stock price has declined below its net book value per share[165](index=165&type=chunk)[167](index=167&type=chunk) - The company's future revenues are at risk due to potential declines in the federal budget, changes in U.S. government spending priorities, or prolonged government shutdowns[168](index=168&type=chunk)[169](index=169&type=chunk)

```markdown PART I - FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Revenue declined significantly in Q2 and H1 2023, net loss narrowed, operating cash flow turned negative, and 2022 financials were revised [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Q2 2023 revenue fell **41.0%** to **$32.9 million**, with net loss narrowing to **$8.0 million**, reflecting similar first-half trends Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | $32,911 | $55,791 | $68,133 | $105,951 | | **Gross Profit** | $12,359 | $20,929 | $25,841 | $39,800 | | **Operating Loss** | $(9,467) | $(14,036) | $(22,437) | $(30,403) | | **Net Loss** | $(8,024) | $(14,159) | $(18,770) | $(30,775) | | **Diluted Net Loss Per Share** | $(0.12) | $(0.21) | $(0.27) | $(0.45) | [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased to **$216.9 million** as of June 30, 2023, with cash, liabilities, and equity all showing declines Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $103,447 | $119,305 | | **Total current assets** | $148,675 | $167,963 | | **Total assets** | $216,860 | $237,397 | | **Total current liabilities** | $37,833 | $45,502 | | **Total liabilities** | $49,324 | $65,043 | | **Total stockholders' equity** | $167,536 | $172,354 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) H1 2023 saw net cash used in operating activities of **$4.2 million**, a negative shift, with increased investing outflows and decreased financing outflows Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | **Net cash (used in)/provided by operating activities** | $(4,213) | $8,132 | | **Net cash used in investing activities** | $(8,468) | $(5,775) | | **Net cash used in financing activities** | $(3,176) | $(6,199) | | **Net change in cash, cash equivalents, and restricted cash** | $(15,857) | $(3,842) | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue, and segment performance, including a **$4.0 million** restructuring plan, **84%** U.S. federal government revenue, and a 2022 interim financial revision - The company committed to a restructuring plan in Q4 2022 and has updated the total expected costs to **$4.0 million** as of June 30, 2023[32](index=32&type=chunk)[33](index=33&type=chunk) - Revenue from U.S. federal government customers accounted for **84%** of total revenue in Q2 2023, with the U.S. Department of Defense alone representing **66%** of total revenue[44](index=44&type=chunk)[46](index=46&type=chunk) - As of June 30, 2023, the company had approximately **$66.5 million** of remaining performance obligations (funded backlog), with about **80%** expected to be recognized as revenue over the next 12 months[48](index=48&type=chunk) - A class action lawsuit filed against the company and certain officers was dismissed with prejudice on June 21, 2023[91](index=91&type=chunk) - Prior year interim financial statements were revised to correct an error where stock-based compensation expense for forfeited PSUs was erroneously reversed, understating G&A expenses by **$1.9 million** for Q2 2022[25](index=25&type=chunk)[96](index=96&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management views 2023 as a transition year, with Q2 revenue decline, improved net loss from reduced SG&A, negative Adjusted EBITDA and Free Cash Flow, yet sufficient liquidity for the next 12 months [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Q2 2023 consolidated revenue decreased **41.0%** to **$32.9 million**, with stable gross margin and improved operating loss due to a **37.6%** SG&A expense reduction impacting both segments - SG&A expenses decreased by **$13.1 million (37.6%)** in Q2 2023 compared to Q2 2022, primarily due to an **$8.7 million** reduction in stock-based compensation costs and a **$2.6 million** decrease in labor costs from reduced personnel[120](index=120&type=chunk) Segment Revenue and Gross Profit (Q2 2023 vs Q2 2022, in thousands) | Segment | Q2 2023 Revenue | Q2 2022 Revenue | % Change | Q2 2023 Gross Profit | Q2 2022 Gross Profit | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Security Solutions** | $17,196 | $30,819 | -44.2% | $9,551 | $16,433 | -41.9% | | **Secure Networks** | $15,715 | $24,972 | -37.1% | $2,808 | $4,496 | -37.5% | [Non-GAAP Financial Measures](index=26&type=section&id=Non-GAAP%20Financial%20Measures) Non-GAAP metrics declined significantly, with Q2 2023 Adjusted EBITDA turning negative, Adjusted Net Loss at **$1.9 million**, and Free Cash Flow at negative **$8.6 million** Key Non-GAAP Financial Measures (in thousands) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | **Adjusted EBITDA** | $(29) | $4,545 | $(875) | $5,514 | | **Adjusted Net (Loss)/Income** | $(1,931) | $2,799 | $(4,474) | $2,102 | | **Free Cash Flow** | $(8,558) | $5,449 | $(12,681) | $2,357 | [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2023, Telos held **$103.4 million** in cash and **$110.8 million** in working capital, with an undrawn **$30.0 million** credit facility, despite a **$4.2 million** net cash outflow from operations - The company's cash and cash equivalents stood at **$103.4 million** as of June 30, 2023[147](index=147&type=chunk) - Net cash used in operating activities was **$4.2 million** for the first six months of 2023, a **$12.3 million** increase in cash outflow compared to the same period in 2022[149](index=149&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company reported no quantitative or qualitative disclosures regarding market risk for the period - None[153](index=153&type=chunk) [Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023[155](index=155&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[156](index=156&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) The company refers to Note 18 for legal proceedings, highlighting the dismissal of a securities class action lawsuit in June 2023, with no other material adverse claims expected - Information regarding legal proceedings is detailed in Note 18, highlighting the dismissal of a class action lawsuit[159](index=159&type=chunk)[91](index=91&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) Key risks include potential goodwill impairment if stock price remains below net book value, and adverse impacts on revenue from federal budget declines or government shutdowns due to U.S. government contract dependence - The company faces a risk of goodwill impairment, as its stock price has traded below net book value per share during the first half of 2023, which may trigger an impairment analysis[161](index=161&type=chunk)[163](index=163&type=chunk) - Dependence on U.S. government contracts creates risk from potential federal budget declines, spending priority shifts, and government shutdowns, which could adversely affect future revenues[164](index=164&type=chunk)[165](index=165&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - None[166](index=166&type=chunk) [Defaults upon Senior Securities](index=32&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[167](index=167&type=chunk) [Mine Safety Disclosures](index=32&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[168](index=168&type=chunk) [Other Information](index=32&type=section&id=Item%205.%20Other%20Information) The company reported no other information - None[169](index=169&type=chunk) [Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files ```

| --- | --- | --- | --- | |------------------------------|-------|-------|-------| | | | | | | | | | | | Second Quarter 2023 Earnings | | | | DISCLAIMERS The information contained in this presentation does not constitute or form part of, and should not be construed as, any offer, sale or subscription of, or any invitation to offer, buy or subscribe for, any securities, nor shall there be any offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful. Telos Co ...

Financial Performance - Consolidated revenue for the first quarter of 2023 was $35.222 million, a decrease of 29.8% compared to $50.160 million in the same period of 2022[106]. - Gross profit for the first quarter of 2023 was $13.482 million, down 28.5% from $18.871 million in the first quarter of 2022, with a gross margin of 38.3% compared to 37.6%[106]. - The company reported a net loss of $10.746 million for the first quarter of 2023, an improvement from a net loss of $16.616 million in the same period of 2022[106]. - For the three months ended March 31, 2023, the net loss was $10,746 thousand, representing a margin of (30.5%), compared to a net loss of $16,616 thousand and a margin of (33.1%) for the same period in 2022[119]. - Adjusted EBITDA for the three months ended March 31, 2023, was $(846) thousand, with an adjusted EBITDA margin of (2.4%), compared to $969 thousand and a margin of 1.9% for the same period in 2022[121]. - The company reported free cash flow of $(4,123) thousand for the three months ended March 31, 2023, compared to $(3,092) thousand for the same period in 2022[124]. Revenue Segments - The Security Solutions segment revenue decreased by $7.1 million, or 26.5%, to $19.773 million in the first quarter of 2023, primarily due to the loss of a program[112]. - The Secure Networks segment revenue decreased by $7.8 million, or 33.5%, to $15.449 million in the first quarter of 2023, attributed to the wind-down of large programs[114]. Expenses and Cost Management - Selling, general, and administrative expenses decreased by $8.8 million, or 24.9%, in the first quarter of 2023 compared to the same period in 2022[108]. - The stock-based compensation expense for the three months ended March 31, 2023, was $9,499 thousand, compared to $15,931 thousand for the same period in 2022[122]. Cash Flow and Liquidity - As of March 31, 2023, the company had cash and cash equivalents of $112.5 million and working capital of $116.5 million[127]. - Net cash used in operating activities for the three months ended March 31, 2023, was $(100) thousand, a decrease of $350 thousand compared to the same period in 2022[129]. - Net cash used in investing activities increased by $1.2 million to $(4,587) thousand for the three months ended March 31, 2023, primarily due to software development costs of $3.8 million[130]. - Net cash used in financing activities decreased by $1.1 million to $(2,156) thousand for the three months ended March 31, 2023, mainly due to a reduction in tax withholding payments related to equity awards[131]. - The company emphasizes liquidity management, with a focus on maintaining a strong balance sheet to support future opportunities[128]. - The company has access to a $30.0 million revolving credit facility, with an available expansion feature of up to an additional $30.0 million[126]. Strategic Focus - The fiscal year 2023 is a transition year for the company, focusing on streamlining operations and generating new business wins[94]. - The company plans to reorganize internally, add new talent, maximize strategic partnerships, and increase the quality of contract vehicles for market expansion[97]. - The U.S. federal budget for FY2023 included a $44 billion increase in total defense spending, with a significant focus on cybersecurity funding[94]. Backlog - The backlog consists of aggregate contract revenues remaining to be earned, with funded backlog expected to be earned within one year[103].

Telos Corporation (NASDAQ:TLS) Q1 2023 Earnings Conference Call May 10, 2023 8:30 AM ET Company Participants Allison Phillips - IR John Wood - Chairman, President & CEO Mark Bendza - EVP & CFO Mark Griffin - EVP of Security Solutions Conference Call Participants Zachary Cummins - B. Riley Securities Bradley Clark - BMO Capital Markets Rudy Kessinger - D.A. Davidson & Co. Operator Good day, and thank you for standing by. Welcome to the Telos Corporation Q1 2033 Earnings Call. [Operator Instructions]. I would ...

Financial Data and Key Metrics Changes - The company reported fourth quarter revenue of $47.3 million, a decline of 26% year-over-year, and total revenue for the year was $216.9 million [5][9] - GAAP gross margin expanded by 95 basis points to 38.6% in the fourth quarter and by 96 basis points to 36.4% for the year [6] - Adjusted EBITDA for the fourth quarter was $5.4 million with an 11.4% margin, while for the year it was $19.5 million with a 9% margin [6][12] - Adjusted EPS was $0.05 for the fourth quarter and $0.19 for the year [6] Business Line Data and Key Metrics Changes - Revenue from the security solutions business declined 11% to $30.3 million, primarily due to the ramp down of the U.S. census program and a more than 50% reduction in revenue from the second largest program [9][10] - Revenue from secure networks fell 43% to $17.1 million, driven by the wind down of three large programs [11] Market Data and Key Metrics Changes - The three largest programs in security solutions generated approximately $70 million in revenues in both 2021 and 2022, but are expected to experience revenue declines of approximately 50% to 100% in 2023 [10] - The three largest programs in secure networks generated $69 million in 2021 and $44 million in 2022, with expectations of single-digit revenues in 2023 [11] Company Strategy and Development Direction - The company is focused on rebuilding and growing its revenue base, with immediate priorities including streamlining operations and enhancing business development [7][22] - New senior leaders have been appointed to drive technology solutions and corporate growth [7][8] - The company aims to maximize existing strategic partnerships and increase market awareness of its solutions [23] Management's Comments on Operating Environment and Future Outlook - Management expressed disappointment with the execution of the long-term growth strategy since the IPO and acknowledged expected revenue contraction in 2023 [5] - The company anticipates 2023 to be a transition year, with significant revenue headwinds from large programs coming to completion [5][17] - Management remains confident in future business development opportunities, citing past performance and strong customer relationships [29] Other Important Information - Free cash flow increased from a $5.9 million net outflow in 2021 to an $11.2 million net inflow in 2022, with cash on the balance sheet exceeding $119 million [13][14] - The company has closed on a $30 million senior secured revolving credit facility, which remains undrawn [14] Q&A Session Summary Question: Insights on new business wins and confidence in growth - The company has won approximately $9 million of new business, but only $1 million to $2 million will be recognized as revenue in 2023 due to timing [27] - Confidence in business development is based on past performance, alignment with government-oriented opportunities, and strong customer knowledge [29] Question: Update on TSA PreCheck launch - The soft launch is ongoing, with final details being worked out to ensure a smooth customer experience, with a national launch expected in 2023 [32] Question: Update on CMS contract - There is currently no update on the CMS contract, and the company is awaiting future order releases [35] Question: Headcount and expense management strategy - Employee reductions were primarily related to billable roles associated with programs experiencing lower operational volume, impacting both billable and non-billable roles [38]

Financial Performance - Total revenue for 2022 was $216.9 million, a decrease of $25.5 million or 11.1% compared to 2021[187]. - Gross profit for 2022 was $79.0 million, down $7.0 million or 8.1% from the previous year, with a gross margin of 36.4%[187]. - The net loss for 2022 was $53.4 million, compared to a net loss of $43.1 million in 2021, representing an increase in loss of $10.3 million[187]. - Adjusted EBITDA for 2022 was $19.5 million, a decrease of $4.9 million or 20.0% from $24.4 million in 2021, with an adjusted EBITDA margin of 9.0%[199]. - Total revenue for 2022 was $216,887,000, a decrease of 10.5% from $242,433,000 in 2021[258]. - The company reported a comprehensive loss attributable to Telos Corporation of $53,456,000 for 2022, compared to a loss of $43,205,000 in 2021[261]. Revenue Sources - Revenue from firm-fixed-price contracts constituted 82.9% of total revenue in 2022, down from 87.6% in 2021, while cost-plus contracts accounted for 11.1% and time-and-material contracts for 6.0%[178]. - Revenue from the Federal government accounted for 95% of total revenue in 2022, down from 96% in 2021[344]. - The U.S. Department of Defense accounted for 74% of total revenue in both 2022 and 2021[346]. - Revenue from the Security Solutions segment decreased by $3.1 million or 2.5% in 2022, primarily due to the end of the Census program[192]. - The Secure Networks segment experienced a revenue decline of $22.5 million or 18.9% in 2022, attributed to the completion of large programs[194]. Cash Flow and Liquidity - Free cash flow for the year ended December 31, 2022, was $11.2 million, a significant improvement from a negative free cash flow of $5.9 million in 2021[203]. - For the year ended December 31, 2022, net cash provided by operating activities was $16.5 million, an increase of 127.5% compared to $7.3 million in 2021[214]. - Cash and cash equivalents as of December 31, 2022, were $119,305,000, a decrease from $126,562,000 in 2021[264]. - The company reported an increase in other income of $2.3 million in 2022, primarily due to dividend income from money market placements[189]. - Net cash used in investing activities for the year ended December 31, 2022, was $13.7 million, a decrease from $19.1 million in 2021[215]. Expenses and Costs - Selling, general and administrative expenses increased by $5.4 million or 4.2% in 2022, primarily due to higher stock-based compensation and labor costs[188]. - Stock-based compensation expense for 2022 amounted to $64.7 million, up from $60.2 million in 2021[201]. - Research and development expenses for 2022 were $16,918,000, down from $19,096,000 in 2021[258]. - The company recorded approximately $2.8 million in involuntary termination benefits during the year ended December 31, 2022, with no similar costs in prior years[323]. Debt and Financing - The company entered a new credit agreement with JPMorgan Chase for a $30 million senior secured revolving facility, which will be used for working capital and general corporate purposes[185]. - The company entered into a $30.0 million senior secured revolving credit facility on December 30, 2022, with no outstanding balances as of December 31, 2022[208][211]. - Net cash used in financing activities was $9.9 million for the year ended December 31, 2022, compared to net cash provided of $32.3 million in 2021[216]. Operational Highlights - Telos anticipates launching its TSA PreCheck enrollment services to the public in 2023 following a successful trial period[185]. - The company’s Xacta offering continues to lead in managing cyber risk and automating compliance across various environments, supporting FedRAMP authorization[169]. - Telos Ghost provides an additional layer of defense against cyber threats by hiding critical resources from visibility, enhancing security architecture[167]. - The company is positioned to expand existing customer relationships despite competitive pressures and potential future spending reductions from the U.S. government[179]. Internal Controls and Compliance - The company did not maintain effective internal control over financial reporting as of December 31, 2022, due to a material weakness identified[238]. - A material weakness in internal control over financial reporting was noted, specifically related to the assessment of accounting for forfeitures of non-standard equity awards[239]. - The company performed its annual goodwill impairment test as of December 31, 2022, resulting in no impairments identified[230]. Assets and Liabilities - Total assets decreased to $237,397,000 in 2022 from $246,081,000 in 2021[264]. - Total liabilities were $65,043,000 as of December 31, 2022, slightly down from $65,827,000 in 2021[264]. - The company reported total contractual obligations of $23.98 million, with $3.82 million due in 2023[218]. - The company capitalized software development costs of $12.7 million in 2022, compared to $10.0 million in 2021[215]. Stockholder Information - The company reported a total stockholders' equity of $172.354 million as of December 31, 2022, an increase from $180.254 million as of December 31, 2021[268]. - The company reported a total of 67,431 shares of common stock outstanding as of December 31, 2022, reflecting an increase from 66,767 shares as of December 31, 2021[268].

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 30, 2022 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 001-08443 TELOS CORPORATION (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Em ...