Telos(US:TLS)2022-05-10 20:24PART I - FINANCIAL INFORMATION Financial Statements Telos Corporation's Q1 2022 financial statements show decreased revenue, increased net loss, and a slight decline in assets and equity, with improved operating cash flow Condensed Consolidated Statements of Operations Q1 2022 saw Telos Corporation's total revenue decrease to $50.16 million, with operating and net losses widening to $14.73 million and $14.98 million respectively Q1 2022 vs Q1 2021 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Total Revenue | $50,160 | $55,757 | | Services Revenue | $48,108 | $52,058 | | Products Revenue | $2,052 | $3,699 | | Gross Profit | $18,871 | $14,469 | | Operating Loss | $(14,734) | $(13,494) | | Net Loss | $(14,983) | $(14,778) | | Net Loss Per Share, Diluted | $(0.22) | $(0.23) | Condensed Consolidated Balance Sheets As of March 31, 2022, Telos Corporation reported total assets of $244.0 million, a slight decrease from year-end 2021, with cash and equity also declining Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $120,233 | $126,562 | | Total current assets | $187,735 | $191,714 | | Total assets | $244,021 | $246,081 | | Total current liabilities | $55,053 | $50,941 | | Total liabilities | $68,960 | $65,827 | | Total stockholders' equity | $175,061 | $180,254 | Condensed Consolidated Statements of Cash Flows Q1 2022 saw cash from operations turn positive at $0.25 million, a significant improvement, despite an overall $6.33 million decrease in cash and equivalents Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Cash provided by (used in) operating activities | $249 | $(6,882) | | Cash used in investing activities | $(3,341) | $(2,645) | | Cash used in financing activities | $(3,237) | $(2,757) | | Decrease in cash and cash equivalents | $(6,329) | $(12,284) | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, Q4 2021 segment reorganization, U.S. government revenue concentration, and a pending securities lawsuit - In Q4 2021, the company reorganized its internal management reporting structure, resulting in two new reportable segments: Security Solutions and Secure Networks. Prior period information has been recast to reflect this change2930 Revenue by Segment (in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Security Solutions | $26,919 | $22,829 | | Secure Networks | $23,241 | $32,928 | | Total Revenue | $50,160 | $55,757 | - Revenue from U.S. government contracts and subcontracts accounted for 95% of total revenue in Q1 2022, down slightly from 96% in Q1 2021. The U.S. Department of Defense represented 71.4% of revenue in the quarter7071 - As of March 31, 2022, the company had $120.0 million in remaining performance obligations (funded backlog), of which 84% is expected to be recognized as revenue in 202276 - A securities class action lawsuit was filed against Telos and certain officers on February 7, 2022, alleging failure to disclose delays related to certain government contracts. The company intends to defend the lawsuit vigorously112 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights a 10% revenue decrease to $50.2 million in Q1 2022, improved gross margin to 37.6%, increased SG&A, and a $14.7 million operating loss, while maintaining strong liquidity Business Overview and Segments Telos provides software-based security solutions through Security Solutions and Secure Networks segments, with performance heavily influenced by U.S. government spending - The company's offerings are divided into two main segments: - Security Solutions: Includes Information Assurance/Xacta, Secure Communications (Telos Ghost, AMHS), and Telos ID - Secure Networks: Focuses on secure mobility solutions and network management/defense services120142143 - Business performance is heavily affected by U.S. government spending. The final FY 2022 appropriations bill provided a $32.5 billion increase for the DoD over FY 2021, and the proposed FY 2023 budget calls for further increases in defense and civilian cybersecurity funding127128131 Consolidated Results of Operations Q1 2022 consolidated results show a 10% revenue decrease to $50.2 million, a 30.4% gross profit increase to $18.9 million, and a net loss of $15.0 million Q1 2022 vs Q1 2021 Performance Summary (in millions) | Metric | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $50.2 | $55.8 | (10.0)% | | Cost of Sales | $31.3 | $41.3 | (24.2)% | | Gross Profit | $18.9 | $14.5 | 30.4% | | SG&A Expense | $33.6 | $28.0 | 20.2% | | Net Loss | $(15.0) | $(14.8) | 1.4% | - The decrease in revenue was attributed to certain projects winding down in the Secure Networks segment147 - Gross margin increased to 37.6% from 26.0% due to a change in the mix of contracts and the relative weighting of revenue between the higher-margin Security Solutions and lower-margin Secure Networks segments149 Segment Results Security Solutions revenue grew 17.9% with margin expansion to 55.9%, while Secure Networks revenue declined 29.4% as projects wound down Security Solutions Segment Performance (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $26,919 | $22,829 | | Gross Profit | $15,051 | $9,326 | | Gross Margin | 55.9% | 40.9% | Secure Networks Segment Performance (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $23,241 | $32,928 | | Gross Profit | $3,820 | $5,143 | | Gross Margin | 16.4% | 15.6% | Non-GAAP Financial Measures Q1 2022 Adjusted EBITDA was $1.0 million, Adjusted Net Loss was $0.7 million, and free cash flow improved significantly to a $3.1 million outflow Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net loss | $(14,983) | $(14,778) | | Enterprise EBITDA | $(13,329) | $(12,134) | | Stock-based compensation expense | $14,298 | $13,670 | | Adjusted EBITDA | $969 | $1,536 | Reconciliation to Adjusted Net Loss (in thousands, except EPS) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Loss (GAAP) | $(14,983) | $(14,778) | | Adjusted Net Loss (Non-GAAP) | $(697) | $(54) | | Adjusted EPS (Non-GAAP) | $(0.01) | $0.00 | Free Cash Flow (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash flows from operating activities | $249 | $(6,882) | | Less: Purchases of property and equipment | $(546) | $(480) | | Less: Capitalized software development costs | $(2,795) | $(2,165) | | Free cash flow | $(3,092) | $(9,527) | Liquidity and Capital Resources Telos maintains strong liquidity with $120.2 million in cash and $132.7 million in working capital, with positive operating cash flow in Q1 2022 - The company's cash and cash equivalent balance was $120.2 million as of March 31, 2022171 - Working capital was $132.7 million as of March 31, 2022, compared to $140.8 million at the end of 2021170 - Cash provided by operating activities was $0.2 million for Q1 2022, compared to cash used of $6.9 million in Q1 2021173 Quantitative and Qualitative Disclosures about Market Risk No quantitative or qualitative disclosures regarding market risk were reported for the period - No disclosures were made regarding market risk178 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2022, due to un-remediated material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2022180 - The ineffectiveness is due to ongoing material weaknesses identified as of December 31, 2021, which include deficiencies in: - Entity-level controls and monitoring activities - IT general controls (user access, change management, segregation of duties) - Controls over revenue recognition, software development costs, stock-based compensation, and the financial statement close process181183 - The company is actively working on remediation efforts, including hiring additional accounting personnel and enhancing processes and controls, but the weaknesses were not fully remediated as of the quarter's end183184 PART II - OTHER INFORMATION Legal Proceedings Legal proceedings information, including a February 2022 securities class action lawsuit, is detailed in Note 14 of the financial statements - Details on legal proceedings can be found in Note 14 – Commitments and Contingencies187 Risk Factors No material changes to the company's risk factors were reported for the quarter ended March 31, 2022 - No material changes to risk factors were reported for the period188 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None reported189