Where to now for Telos & its IPO proceeds?

Telos Corp. sought to raise nearly $255.7 million in proceeds through its initial public offering that officially kicked off Nov. 19 when the cybersecurity company’s stock began to trade on NASDAQ exchange.

While only in week two, it is a case of so far so good for Telos as the IPO generated around $292.6 million in gross proceeds. The approximate $38 million jump is due to the IPO’s underwriters exercise of their option to buy more shares to fulfill demand from public investors.

Ashburn, Virginia-based Telos’ stock hit the market at $17.00 per share, completed day one with a 19-percent gain to $20.29 and briefly hit $23.00 in mid-morning trade Monday.

So where to now for the five-decade-old company and where exactly will the proceeds go?

When I spoke with CEO John Wood on Nov. 19, he mentioned that Telos has focused much of its attention and capital on product development including the scaling and delivery aspects.

Telos’ three flagship products focus on security compliance for cloud migrations, keeping assets away from hackers’ lines of sight and continuous background vetting to determine how trustworthy people are.

But where Telos has not focused much of its attention and capital on is sales and marketing, which eight employees are identified as being responsible for with another six support people alongside them.

Wood said he wants to use part of the proceeds to double that number to 28 from 14 and then double it again to 56.

Telos’ S-1 registration statement for its IPO says that for next year, the company is “planning on implementing an approximate 300 percent increase from our 2020 sales and marketing investment.”

Helping Telos on that front is what Wood described to me as “100 percent customer referenceability” for its products, while half of the company’s revenue comes from sole-source or limited competition contracts.

The S-1 filing says Telos plans to focus next year’s sales efforts for its Xacta security compliance and Ghost misattribution products in commercial markets that are highly-regulated such as financial services, health care, energy and other critical infrastructure sectors.

That would indicate Telos’ push to diversify its revenue base beyond the 93.7-percent share that federal government sales holds. But Telos plans to further invest in products to serve that vertical.

For example, the Xacta product is available to federal agencies through the governmentwide Continuous Diagnostics and Mitigation program for their cybersecurity efforts. Xacta is also available to use in the Amazon Web Services and Microsoft Azure cloud infrastructure offerings for government.

Xacta already has a leg up on that front given that Telos worked with Amazon Web Services and the CIA to refactor that product for use in the agency’s implementation of AWS’ commercial cloud.

As ever with all public companies, there are risk factors investors must consider in any potential purchase of Telos stock and that section of the S-1 takes up 10 pages.

Roughly half of those factors relate to the Telos’ business and the markets it plays in, including the nature of government spending and potential impacts of COVID-19.

The second half contains factors that typical of all companies new to the public exchanges, including the nature of fluctuating stock prices and what that could mean for the company.

Telos will also not pay cash dividends on its stock “in the foreseeable future,” instead opting to reinvest earnings into the business. But that does not mean forever as the board of directors could decide to at its discretion.

Regarding the COVID factor, Telos believes its business is relatively resistant to some of those impacts given the remote workforce and how automation is a key feature of many of the company’s products.