Telos(TLS) - 2023 Q2 - Quarterly Report

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