What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-13 compared with 2020-05-15 · 122 added, 84 removed, 421 unchanged (33% of the section changed)

22 unchanged sentences

Our consultants assess our customers’ security environments and design, engineer, and operate the systems they need to strengthen their cybersecurity posture.

Cloud Security – The cloud

as an organizational resource is more than two decades old, yet the needs of cloud users are constantly changing.

Telos offers the specialized skills and experience needed to help our customers plan, engineer, and execute secure cloud

migration strategies and then assure ongoing management and security in keeping with the leading standards for cloud-based systems and workloads.

Enterprise Security –

Securing the enterprise means protecting the essential and timeless elements common to every organization:

Cloud Security – The cloud as

an organizational resource is more than two decades old, yet the needs of cloud users are constantly changing.

Telos offers the specialized skills and experience needed to help our customers plan, engineer, and execute secure cloud migration

strategies and then assure ongoing management and security in keeping with the leading standards for cloud-based systems and workloads.

Enterprise Security – Securing

the enterprise means protecting the essential and timeless elements common to every organization:

Its people and processes, its supply chain and inventories, its finances and facilities, its information and communications.

and OT systems have become part of the organizational DNA, Telos has led with offerings that ensure personnel can work securely and productively across and beyond the enterprise.

As ICT and OT

systems have become part of the organizational DNA, Telos has led with offerings that ensure personnel can work securely and productively across and beyond the enterprise.

In March 2020, the coronavirus disease 2019 ("COVID-19") was declared a pandemic by the World Health Organization and a

1 unchanged sentence

The pandemic has negatively affected the U.S.

and global economy, disrupted global supply chains and financial markets, and resulted governments around the world implementing increasingly stringent measures

to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

In addition, governments and central banks in several parts

of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

and global economy, disrupted global supply chains and financial markets, and resulted in governments around the world implementing increasingly stringent

measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

In addition, governments and central banks in

several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are taking prudent measures to protect the health and safety of our employees, such as practicing social distancing and

14 unchanged sentences

While we have experienced certain internal disruptions in adapting our operations as described above to the changed and

evolving conditions, the majority of our program operations have not been adversely impacted, we have implemented alternative means to support requirements.

Due to the essential nature of the majority of our business, the programs that were adversely

impacted did not experience those effects until the final two weeks of the quarter, and the overall impact of the COVID-19 pandemic on our results of operations and liquidity were immaterial in the first quarter of 2020.

The financial impact of the

COVID-19 pandemic cannot be reasonably estimated at this time as its impact depends on future developments, which are highly uncertain and cannot be predicted.

New information may emerge concerning the scope, severity and duration of the COVID-19

pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic (including restrictions and limitations on travel and transportation) among others.

Additionally,

COVID-19 and the mitigation efforts adopted to limit the spread of the disease have had a significant impact on the global economy.

With economic activity curtailing in the United States and other regions, we could experience delays in our supply

chain or challenges when attempting to access financial markets.

evolving conditions, the majority of our program operations have not been adversely impacted, and we have implemented alternative means to support requirements.

Due to the essential nature of the majority of our business, the programs that were

adversely impacted did not experience those effects until the final two weeks of the first quarter, and the overall impact of the COVID-19 pandemic on our results of operations and liquidity were immaterial in the first two quarters of 2020.

financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time as its impact depends on future developments, which are highly uncertain and cannot be predicted.

New information may emerge concerning the scope, severity and

duration of the COVID-19 pandemic, actions to contain its spread or treat its impact, and governmental, business and individuals’ actions taken in response to the pandemic (including restrictions and limitations on travel and transportation) among

Additionally, COVID-19 and the mitigation efforts adopted to limit the spread of the disease have had a significant impact on the global economy.

With economic activity curtailing in the United States and other regions, we could experience

delays in our supply chain or challenges when attempting to access financial markets.

Many of our contracts with the U.S.

16 unchanged sentences

Because many factors affect the scheduling and continuation of projects, no assurance can be given as to when revenue will be realized on projects included in our backlog.

At March 31, 2020 and 2019, we had total backlog from existing contracts of approximately $334.0

At June 30, 2020 and 2019, we had total backlog from existing contracts of approximately $308.6

million and $255.0 million, respectively.

2 unchanged sentences

under those contracts, including renewal options available on the contracts if fully exercised by the customers.

Funded backlog as of March 31, 2020 and 2019 was $102.5 million and $84.6 million, respectively.

Funded backlog as of June 30, 2020 and 2019 was $84.8 million and $74.1 million, respectively.

Funded backlog was $112.4

60 unchanged sentences

comprehensive appropriations and economic stimulus measures, as well as negotiations between Congress and the White House for additional massive initiatives for the current year and into the next fiscal year, the details of which are not yet

These substantial alterations to FY 2020 spending baselines are also likely to further impact FY 2021 spending in ways that cannot now be predicted.

The impact of the health and economic crisis, and the resulting large increase in

federal spending, on the government contracts that we hold and the federal procurements that we would otherwise compete for cannot now be known.

These substantial alterations to FY 2020 spending baselines are also likely to further impact FY 2021 spending in ways that cannot be predicted.

The impact of the health and economic crisis, and the resulting large increase in federal

spending, on the government contracts that we hold and the federal procurements that we would otherwise compete for cannot be known.

In addition to the ongoing need to respond to the crisis in the current fiscal year, Congress and the President must agree

4 unchanged sentences

Government has been unable to complete its appropriations process prior to the beginning of the next fiscal year, resulting in actual or threatened

governmental shut-downs and repeated use for extended time periods each year of Continuing Resolutions to fund part of all of the government.

governmental shut-downs and repeated use for extended time periods each year of Continuing Resolutions to fund part or all of the government.

The impact of the substantial additional spending on the Coronavirus pandemic on the appropriations for FY

2021, and the appropriations process itself, is not now known.

2021, and the appropriations process itself, is not known.

The current health and economic crisis is highly fluid, and it is likely to continue to affect multiple federal departments

12 unchanged sentences

year ended December 31, 2019.

The principal elements of the Company’s operating expenses as a percentage of sales for the three months ended March 31,

The principal elements of the Company’s operating expenses as a percentage of sales for the three and six months ended June

30, 2020 and 2019 are as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of sales

1 unchanged sentence

Operating income (loss)

Interest expense, net

Loss before income taxes

Interest expense

Income (loss) before income taxes

Benefit from income taxes

Net income attributable to non-controlling interest

Net loss attributable to Telos Corporation

Revenue increased by 25.1% to $39.0 million for the first quarter of 2020, from $31.2 million for the same period in 2019.

Services revenue increased to $34.6 million for the first quarter of 2020 from $28.0 million for the same period in 2019, primarily attributable to increases in sales of $3.6 million of Telos ID Enterprise Solutions, $2.4 million of Secure

Communications Cyber and Enterprise Solutions, $1.1 million of Secure Mobility and Network Management/Defense Enterprise Solutions, offset by a decrease in sales of $0.5 million of Cyber & Cloud Solutions.

Net income (loss)

Net (income) loss attributable to non-controlling interest

Net income (loss) attributable to Telos Corporation

Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019

Revenue increased by 34.8% to $48.6 million for the second quarter of 2020, from $36.0 million for the same period in 2019.

Services revenue increased to $45.5 million for the second quarter of 2019 from $34.4 million for the same period in 2019, primarily attributable to increases in sales of $9.6 million of Telos ID Enterprise Solutions and $2.8 million of Secure

Communications Cyber and Enterprise Solutions, offset by decreases in sales of $1.2 million of Secure Mobility and Network Management/Defense Enterprise Solutions and $0.1 million of Cyber & Cloud Solutions.

The change in product and services

revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables.

Product revenue increased to $4.4 million for the first quarter of 2020 from $3.1 million for the

same period in 2019, primarily attributable to an increase in sales of $1.4 million of Cyber & Cloud Solutions, offset by a decrease in resold products of $0.2 million of Telos ID Enterprise Solutions.

Cost of sales increased by 20.5% to $26.7 million for the first quarter of 2020, from $22.2 million for the same period in

Cost of sales for services increased by 23.2%, and as a percentage of services revenue were consistent at 28%.

Cost of sales for products increased by 42.4%, and as a percentage of product revenue decreased by 21.5% due primarily to an increase

in proprietary software sales which carry lower cost of sales.

The increase in cost of sales is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary from period to period, and further can be

affected by the timing of deliverables.

Gross profit increased to $12.2 million for the first quarter of 2020 from $9.0 million for the same period in 2019.

margin increased to 31.4% in the first quarter of 2020, from 28.8% for the same period in 2019.

Services gross margin was 28.0% in both periods, and product gross margin increased to 57.6% in 2020 from 36.1% in 2019, due primarily to an increase in

proprietary software as noted above.

Selling, general, and administrative expense increased by 14.3% to $11.8 million for the first quarter of 2020, from $10.4

million for the same period in 2019, primarily attributable to increases in outside services of $1.3 million, labor costs of $0.8 million, and trade shows costs of $0.1 million, offset by the capitalization of software development costs of $0.9

Operating income was $0.4 million for the first quarter of 2020, compared to operating loss of $1.4

million for the same period in 2019, due primarily to the increase in gross profit as noted above.

Interest expense increased by 14.6% to $2.0 million for the first quarter of 2020, from $1.8 million

for the same period in 2019, primarily due to an increase in interest on the EnCap senior term loan, offset by a decrease in interest on an equipment purchase arrangement.

Income tax benefit was $0.1 million for the first quarter of 2020, compared to $0.2 million for the same period in 2019,

which is based on the estimated annual effective tax rate applied to the pretax loss incurred for the quarter plus discreet tax items, based on our expectation of pretax loss for the fiscal year.

Net loss attributable to Telos Corporation was $2.2 million for the first quarter of 2020, compared to $3.4 million for the

same period in 2019, primarily attributable to the increase in operating income for the quarter as discussed above.

Product revenue increased to $3.1 million for the second quarter of 2020 from $1.7 million for the

same period in 2019, primarily attributable to increases in sales of $1.5 million of Telos ID Enterprise Solutions and $0.3 million of Cyber & Cloud Solutions, offset by a decrease in sales of $0.4 million of Secure Communications Cyber and

Enterprise Solutions.

Cost of sales increased to $31.0 million for the second quarter of 2020, from $26.0 million for the same period in 2019,

primarily due to an increase in revenue of $12.6 million, however cost of sales as a percentage of revenue decreased by 8.4%.

Cost of sales for services increased by $4.2 million, and as a percentage of services revenue decreased by 8.7%, due to a

change in the mix of the programs and timing of certain Telos ID Enterprise Solutions deliverables.

Cost of sales for products increased by $0.8 million, and as a percentage of product revenue increased by 3.4% due primarily to an increase in product

reselling, which carries a greater cost of sales.

The increase in cost of sales as a percentage of revenue is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary from period to period, and

further can be affected by the timing of deliverables.

Gross profit increased by 75.5% to $17.6 million for the second quarter of 2020 from $10.0 million for the same period in

Gross margin increased to 36.2% in the second quarter of 2020, from 27.8% for the same period in 2019.

Services gross margin increased to 35.4% in 2020 from 26.7% in 2019 due to the change in program mix during the period as noted above,

primarily in Telos ID Enterprise Solutions, and product gross margin decreased to 46.9% in 2020 from 50.3% in 2019, due primarily to an increase in product reselling.

Selling, general, and administrative expense (SG&A) increased by 19.8% to $12.5 million for the second quarter of 2020,

from $10.4 million for the same period in 2019, primarily attributable to increases in outside services of $1.4 million, labor costs of $1.3 million, and accrued bonuses of $0.9 million, offset by an increase in capitalized software development costs

of $1.0 million, and decreases in trade shows costs of $0.3 million and travel costs of $0.2 million.

Operating income was $5.1 million for the second quarter of 2020, compared to an operating loss of $0.4 million for the

same period in 2019, due primarily to an increase in gross profit as noted above.

Interest expense increased by 14.7% to $2.0 million for the second quarter of 2020, from $1.7 million

for the same period in 2019, primarily due to an increase in interest on the EnCap senior term loan.

Income tax provision was $2,000 for the second quarter of 2020, compared to $20,000 for the same period in 2019, which is

based on the estimated annual effective tax rate applied to the pretax income incurred for the quarter plus discreet tax items, based on our expectation of pretax loss for the fiscal year.

Net income attributable to Telos Corporation was $0.3 million for the second quarter of 2020, compared to a net loss of

$1.7 million for the same period in 2019, primarily attributable to the operating income for the quarter as discussed above.

Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019

Revenue increased by 30.3% to $87.6 million for the six months ended June 30, 2020, from $67.2 million in the same period

Services revenue increased to $80.0 million for the six months ended June 30, 2020, from $62.4 million for the same period in 2019, primarily attributable to increases in sales of $13.2 million of Telos ID Enterprise Solutions and $5.1

million of Secure Communications Cyber and Enterprise Solutions, offset by decreases in sales of $0.6 million of Cyber & Cloud Solutions and $0.1 million of Secure Mobility and Network Management/Defense Enterprise Solutions.

The change in

product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables.

Product revenue increased to $7.5 million for the six months ended June 30,

2020, from $4.8 million for the same period in 2019, primarily attributable to increases in sales of $1.7 million of Cyber & Cloud Solutions proprietary software deliverables and $1.3 million of Telos ID Enterprise Solutions, offset by a decrease

in sales of $0.3 million of Secure Communications Cyber and Enterprise Solutions.

Cost of sales increased by 19.8% to $57.8 million for the six months ended June 30, 2020, from $48.2 million for the same

period in 2019, primarily due to an increase in revenue of $20.4 million, however cost of sales as a percentage of revenue decreased by 5.8%.

Cost of sales for services increased by $8.8 million, and as a percentage of services revenue decreased by

5.0%, due primarily to a change in the mix of the programs and timing of certain Telos ID Enterprise Solutions deliverables.

Cost of sales for products increased by $0.7 million, and as a percentage of product revenue decreased by 12.1% due primarily

to an increase in proprietary software sales which carry lower cost of sales.

The increase in cost of sales as a percentage of revenue is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary

from period to period, and further can be affected by the timing of deliverables.

Gross profit increased by 57.0% to $29.8 million for the six months ended June 30, 2020, from $19.0 million compared to the

same period in 2019, due primarily to the change in the mix of the solutions sold as discussed above, primarily in Telos ID Enterprise Solutions.

Gross margin increased to 34.0% for the six months ended June 30, 2020, from 28.2% in the same period in

SG&A expense increased by 17.1% to $24.3 million for the six months ended June 30, 2020, from $20.8 million for the

same period in 2019, primarily attributable to increases in outside services of $2.6 million, labor costs of $2.1 million, and accrued bonuses of $0.9 million, offset by an increase in capitalized software development costs of $1.9 million, and a

decrease in legal costs of $0.3 million.

Operating income was $5.5 million for the six months ended June 30, 2020, compared to an operating loss of $1.8 million for

the same period in 2019, due primarily to an increase in gross profit as noted above.

Interest expense increased by 14.7% to $4.0 million for the six months ended June 30, 2020, from $3.5 million for the same

period in 2019, primarily due to an increase in interest on the EnCap senior term loan.

Income tax benefit was $144,000 for the six months ended June 30, 2019, compared to $177,000 for the same period in 2019,

which is based on the estimated annual effective tax rate applied to the pretax loss incurred for the six month period plus discreet tax items, adjusted for the income tax benefit previously provided, based on our expectation of pretax loss for the

Net loss attributable to Telos Corporation was $2.0 million for the six months ended June 30, 2020, compared to $5.2

million for the same period in 2019, primarily attributable to the operating income as discussed above.

Liquidity and Capital Resources

32 unchanged sentences

capital by selling equity, although no assurances can be given that these investors would be able to invest or that the Company and the investors would agree upon terms for such investments.

Our working capital was $(14.8) million and $2.9 million as of March 31, 2020 and December 31, 2019, respectively.

Our working capital was $(12.8) million and $2.9 million as of June 30, 2020 and December 31, 2019, respectively.

current working capital deficit is due to the classification of the EnCap Credit Agreement as a current liability as discussed in Note 5 to the financial statements, although the Fifth Amendment to the Credit Agreement provides us the option to

3 unchanged sentences

operations are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Cash provided by operating activities was $1.7 million for the three months ended March 31, 2020, compared to $4.0 million

for the same period in 2019.

Cash provided by operating activities was $0.8 million for the six months ended June 30, 2020, compared to $5.9 million for

the same period in 2019.

Cash provided by or used in operating activities is primarily driven by the Company’s operating income, the timing of receipt of customer payments, the timing of its payments to vendors and employees, and the timing of

inventory turnover, adjusted for certain non-cash items that do not impact cash flows from operating activities.

Additionally, net loss was $1.4 million for the three months ended March 31, 2020, compared to $2.9 million for the three months ended

March 31, 2019.

Cash used in investing activities was approximately $1.7 million and $2.9 million for the three months ended March 31, 2020

and 2019, respectively, due primarily to the capitalization of software development costs of $1.5 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively, and the purchase of property and equipment.

Cash used in financing activities for the three months ended March 31, 2020 was $0.4 million, compared to $1.0 million for

the same period in 2019, primarily attributable to payments under finance leases and amendment fee paid to lender for the three months ended March 31, 2020, compared to distribution of $0.7 million to the Telos ID Class B member and payments under

finance leases for the three months ended March 31, 2019.

Additionally, net income was $1.6 million for the six months ended June 30, 2020, compared to a net loss of $4.9 million for the six

months ended June 30, 2019.

Cash used in investing activities was approximately $3.5 million and $3.7 million for the six months ended June 30, 2020

and 2019, respectively, due primarily to the capitalization of software development costs of $3.2 million and $1.3 million for the six months ended June 30, 2020 and 2019, respectively, and the purchase of property and equipment $0.3 million and $2.4

million for the six months ended June 30, 2020 and 2019, respectively.

Cash used in financing activities for the six months ended June 30, 2020 was $1.7 million, compared to $1.5 million for the

same period in 2019, primarily attributable to payments under finance leases and distribution to the Telos ID Class B member for both periods.

Additionally, our capital structure consists of redeemable preferred stock and common stock.

79 unchanged sentences

being amortized over the term of the loan using the effective interest method at a rate of 17.3% over the remaining term of the loan.

For the measurement period ended March 31, 2020 we were in compliance with the Credit Agreement’s financial

For the measurement period ended June 30, 2020, we were in compliance with the Credit Agreement’s financial

covenants, based on an agreement between the Company and EnCap on the definition of certain input factors that determine the measurement against the covenants.

11 unchanged sentences

by contractual right to extend the maturity of the loan, which the Company intends to consider exercising at the appropriate time.

We incurred interest expense in the amount of $0.8 million and $0.4 million for the three months ended March 31, 2020 and

2019, respectively, under the Credit Agreement.

We incurred interest expense in the amount of $0.7 million and $1.5 million for the three and six months ended June 30,

2020, respectively, and $0.4 million and $0.8 million for the three and six months ended June 30, 2019, respectively, under the Credit Agreement.

Accounts Receivable Purchase Agreement

63 unchanged sentences

We incurred interest expense in the amount of $88,000 and $175,000 for the three

months ended March 31, 2020 and 2019, respectively, on the Porter Notes.

As of March 31, 2020, approximately $1.1 million of accrued interest was payable according to the stated interest rate of the Porter Notes.

and six months ended June 30, 2020, respectively, and $82,000 and $162,000 for the three and six months ended June 30, 2020, respectively, on the Porter Notes.

As of June 30, 2020, approximately $1.2 million of accrued interest was payable according

to the stated interest rate of the Porter Notes.

Public Preferred Stock

10 unchanged sentences

shares of the Public Preferred Stock.

The total number of shares issued and outstanding at March 31, 2020 and December 31, 2019 was 3,185,586.

The total number of shares issued and outstanding at June 30, 2020 and December 31, 2019 was 3,185,586.

The Public Preferred Stock is quoted as “TLSRP” on the OTCQB marketplace and the OTC Bulletin Board.

10 unchanged sentences

Therefore, we classify these securities as

noncurrent liabilities in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019.

noncurrent liabilities in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.

On January 25, 2017, we became parties with certain of our subsidiaries to the Credit Agreement with EnCap.

8 unchanged sentences

would otherwise require any acceleration of the redemption of or amortization of payments with respect to the Public Preferred Stock.

Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from March 31,

Thus, the Public Preferred Stock is not and will not be due on demand, nor callable, within 12 months from June 30,

This classification is consistent with ASC 210, “Balance Sheet” and 470, “Debt” and the FASB ASC Master Glossary definition of “Current Liabilities.”

24 unchanged sentences

and 1991 were paid at the rate of 6% per share for each $.60 of such dividends not paid in cash.

For the cash dividends payable since December 1, 1995, we have accrued $108.3 million and $107.4 million as of March 31, 2020 and December 31, 2019,

For the cash dividends payable since December 1, 1995, we have accrued $109.3 million and $107.4 million as of June 30, 2020 and December 31, 2019,

respectively.

We accrued dividends on the Public Preferred Stock of $1.0 million for each of the three months ended March 31, 2020 and 2019, which was recorded as interest expense.

Prior to the effective date of ASC 480 on July 1, 2003, such

dividends were charged to stockholders’ accumulated deficit.

We accrued dividends on the Public Preferred Stock of $1.0 million and $1.9 million for each of the three and six months ended June 30, 2020 and 2019, respectively, which was recorded as interest expense.

Prior to the effective date of

ASC 480 on July 1, 2003, such dividends were charged to stockholders’ accumulated deficit.

Recent Accounting Pronouncements

2 unchanged sentences

Critical Accounting Policies

During the three months ended March 31, 2020, there were no material changes to our critical accounting policies as

reported in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on April 13, 2020.

During the three months ended June 30, 2020, there were no material changes to our critical accounting policies as reported

in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on April 13, 2020.

Quantitative and Qualitative Disclosures about Market Risk

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis