TELOS CORP

Results of Operations

Consolidated Results

Our business segments are driven by different factors, leading to revenue fluctuations and varying profitability. The discussion of the changes in our revenue and gross margin is 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.

Operating expenses

In the third quarter of 2025, operating expenses decreased by $9.0 million, or 28.1%, compared to the same quarter in 2024. This was primarily due to the impairment loss on intangible assets of $6.4 million recorded in the third quarter of 2024, whereas there was none for the same quarter of this current year. Research and development ("R&D") expenses decreased by $0.5 million, or 21.2%, in the third quarter of 2025, compared to the same period in 2024, primarily due to the lower amortization costs associated with the discontinued development of selected solutions in the third quarter of 2024. Selling, general and administrative ("SG&A") expenses decreased by $2.1 million, or 9.1%, in the third quarter of 2025, compared to the same period in 2024. These decreases were largely the result of lower labor costs due to the restructuring efforts taken in the third quarter of 2024.

For the nine months ended September 30, 2025, operating expenses decreased by $3.7 million, or 5.3%, compared to the same period in 2024. An impairment loss on intangible assets of $6.4 million was recorded for the nine months ended September 30, 2024, whereas there was none for the same period of this current year. R&D expenses decreased by $2.1 million, or 29.2%, for the nine months ended September 30, 2025, compared to the same period in 2024. This was primarily due to lower amortization costs associated with the discontinued development of select solutions in the third quarter of 2024. SG&A expenses increased by $4.7 million, or 8.4%, for the nine months ended September 30, 2025, compared to the same period in 2024. This was due to higher stock-based compensation costs, partially offset by lower labor costs due to the restructuring efforts taken in the third quarter of 2024 and lower cash incentive compensation expense.

Other income

Other income decreased by $0.5 million, or 48.0%, for the third quarter of 2025, compared to the same period in 2024. Similarly, other income decreased by $1.7 million, or 50.7%, for the nine months ended September 30, 2025, compared to the same period in 2024. The decreases in other income for the three and nine months ended September 30, 2025, were primarily due 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.

Three Months Ended September 30, 2025, Compared with Three Months Ended September 30, 2024

Security Solutions segment revenue for the third quarter of 2025 increased by $28.1 million, or 153.5%, compared to the same quarter in 2024, primarily due to the ongoing expansion of multiple large programs in Telos ID.

Security Solutions segment gross profit for the third quarter of 2025 increased by $17.0 million, or 734.9%, compared to the same quarter in 2024, due to higher segment revenue and higher segment gross margin.

Segment gross margin for the quarter increased from 12.6% in 2024 to 41.5% in 2025, due to the decrease in cost of sales related to the impairment loss on intangible assets taken in the third quarter of 2024, whereas there was none for this current quarter.

Nine Months Ended September 30, 2025, Compared with Nine Months Ended September 30, 2024

For the nine months ended September 30, 2025, Security Solutions segment revenue increased by $49.9 million, or 91.1%, compared to the same period in 2024, primarily due to the ongoing expansion of multiple large programs in Telos ID.

Segment gross profit for the nine months ended September 30, 2025 increased by $23.4 million, or 128.8%, compared to the same period in 2024, due to higher segment revenues and higher segment gross margin.

Year-to-date segment gross margin increased from 33.2% in 2024 to 39.7% in 2025, due to the decrease in cost of sales related to the impairment loss on intangible assets taken in 2024, whereas there was none in the current year, partially offset by unfavorable program mix.

Three Months Ended September 30, 2025, Compared with Three Months Ended September 30, 2024

Secure Networks segment revenue for the third quarter of 2025 decreased by $0.5 million, or 8.9%, compared to the same period in 2024, primarily due to the ramp down of several programs within the portfolio.

Segment gross profit for Secure Networks for the third quarter of 2025 increased by $0.4 million, or 51.3%, compared with the same period in 2024. Likewise, segment gross margin for the quarter increased from 15.3% in 2024 to 25.4% in 2025 primarily due to revenue mix.

Nine Months Ended September 30, 2025, Compared with Nine Months Ended September 30, 2024

Secure Network segment revenue for the nine months ended September 30, 2025, decreased by $13.8 million, or 51.0%, compared to the same period in 2024, primarily due to the ramp down of several programs within the portfolio without corresponding new business wins to backfill completed programs.

Segment gross profit for the nine months ended September 30, 2025, decreased by $2.6 million, or 46.2%, compared to the same period in 2024, due to lower segment revenue.

Year-to-date segment gross margin increased from 20.7% in 2024 to 22.7% in 2025, primarily due to the results of revenue mix.