TELOS CORP

Results of Operations

Consolidated Results

Our business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes in our revenue and profitability are covered in greater detail in the following section, "Segment Results." We generate revenue from the delivery of products and services to our customers. Cost of sales, for both products and services, consists of labor, materials, subcontracting costs and an allocation of indirect costs.

R&D expenses.

In the second quarter of 2024, R&D expenses decreased by $1.2 million, or 44.9%, compared to the same quarter in 2023. Similarly, R&D expenses decreased by $0.9 million, or 15.5%, for the six months ended June 30, 2024, compared to the same period in the prior year. The decreases in R&D expenses for both periods were primarily due to the completion of certain development projects in 2023 and lower stock-based compensation expenses, partially offset by lower capitalization and higher amortization expense.

SG&A expenses.

SG&A expenses for the three months ended June 30, 2024 decreased by $2.3 million, or 11.9%, compared to the same period in 2023. Likewise, SG&A expenses decreased by $9.7 million, or 22.6%, for the six months ended June 30, 2024, compared to the same period in the prior year. The decreases in SG&A expense for both periods were primarily due to the decline in stock-based compensation costs, depreciation and amortization expenses, and outside services, partially offset by an increase in labor costs.

In addition, there were $1.2 million of restructuring expenses for the six months ended June 30, 2023, with no similar charges in 2024.

Other income.

Other income decreased by $0.6 million for the three months ended June 30, 2024, compared to the same period in 2023, due to the change in dividend income from money market placements.

Other income for the six months ended June 30, 2024 was $2.3 million as compared to $4.1 million for the six months ended June 30, 2023. The decrease was primarily due to the gain on early extinguishment of other financing obligations of $1.4 million in fiscal year 2023, without a similar gain in fiscal year 2024. The remaining variance is attributable to the change in dividend income from money market placements.

Segment Results

The accounting policies of each business segment are the same as those followed by the Company as a whole. Management evaluates business segment performance based on gross profit.

For the three months ended June 30, 2024, Security Solutions segment revenue slightly increased by $0.7 million, or 3.9%, compared to the same period in 2023, primarily due to the growth in TSA PreCheck, partially offset by contraction elsewhere in the portfolio.

Security Solutions segment revenue for the six months ended June 30, 2024, slightly decreased by $0.5 million, or 1.2%, compared to the same period in 2023, primarily due to the reductions in two large programs, partially offset by the growth in TSA PreCheck.

Security Solutions gross profit for the second quarter of 2024 decreased by $2.3 million, or 23.9%, compared with the same period in 2023. Likewise, segment gross profit for the six months ended June 30, 2024, decreased by $3.9 million, or 19.8%, compared to the same period in 2023. In addition, Security Solution gross margin for the second quarter of 2024 decreased from 55.5% to 40.7%, while year to date segment gross margin decreased from 53.6% to 43.5%. The decrease in gross profit and gross margin for the three and six months ended June 30, 2024, was primarily due to the increased amortization of software development costs and program mix within the portfolio.

Secure Networks segment revenue for the three months ended June 30, 2024, decreased by $5.1 million, or 32.4%, compared to the same period in 2023. Likewise, Secure Network segment revenue for the six months ended June 30, 2024 decreased by $9.6 million, or 30.7%, compared to the same period in 2023. The decrease in revenue for the three and six months ended June 30, 2024, is primarily due to the successful completion and ramp down of programs.

Gross profit for Secure Networks slightly decreased by $0.4 million, or 13.0%, for the second quarter of 2024, compared with the same period in 2023. Segment gross profit for the six months ended June 30, 2024, decreased by $1.2 million, or 20.6%, compared to the same period in 2023. The change in gross profit for the three and six months ended June 30, 2024, is primarily due to lower revenue, partially offset by improved margin across the portfolio.

Secure Networks gross margin increased to 23.0% for the second quarter of 2024 from 17.9% for the same period in 2023. Likewise, segment gross margin in the first half of 2024 increased from 19.3% in 2023 to 22.1% in 2024. The gross margin expansion, for the three and six months ended June 30, 2024, is primarily due to strong program management and favorable program mix.