TELOS CORP

U.S. Federal Government Budget

In fiscal year ("FY") 2025, we generated approximately 91.0% of our revenues from the U.S. federal government, either as prime contractor or a subcontractor to other contractors engaged in work for the U.S. federal government, including 58.1% of our revenue from the DoW. Accordingly, our business performance is affected by the overall level of U.S. federal government spending and the alignment of our offerings and capabilities with current and future budget priorities of the U.S. federal government.

While we view the budget environment as constructive and believe there is bipartisan support for continued investment in the areas of defense and national security, it is uncertain when (and if) in any particular government fiscal year appropriations bills will be passed. During those periods of time when appropriations bills have not been passed and signed into law, U.S. federal government agencies operate under a continuing resolution ("CR"), a temporary measure that allows the government to continue operations at prior year funding levels.

The FY2025 U.S. federal government appropriations, which ran through September 30, 2025, were determined by a full-year CR. While the Administration has submitted its FY2026 budget proposal outlining its priorities, partisan disagreements over federal spending levels, among other things, have stalled progress on the required appropriations bills. Recently, on February 3, 2026, Congress passed another full-year CR for FY2026 to end the partial government shutdown. This enacted bill provides full-year funding for several programs, including defense and national security, through September 30, 2026; and also extended homeland security funding through February 13, 2026. A partial government shutdown began on February 14, 2026 after the lawmakers and the White House failed to reach a deal on legislation to fund DHS through September 2026. The impasse affects agencies such as the Transportation Security Administration, the Federal Emergency Management Agency, U.S. Coast Guard, the Secret Service, U.S. Immigration and Custom Enforcement, and U.S. Customs and Border Protection.

Congress approved a FY2026 Defense Appropriations Bill that provides $838.7 billion in discretionary funding, including $838.5 billion in defense funding and $180 million in nondefense funding. This funding prioritizes restoring military strength, accelerating modernization, and supporting personnel through pay raises. This bill moves in parallel with the National Defense Authorization Act ("NDAA"), signed in December 2025, which authorizes up to approximately $900.6 billion for national defense.

The federal government's cybersecurity and IT spending priorities for fiscal years 2025 and 2026 present both significant opportunities and notable risks for our suite of security solutions. The FY2026 NDAA authorizes approximately $15.1 billion for DoW cyber activities, representing a 4.1% increase. The FY2026 NDAA emphasizes securing the defense industrial base, accelerating artificial intelligence ("AI") integration, and harmonizing cybersecurity requirements. This increase directly aligns with our core offerings in cyber risk management (e.g., Xacta).

Further, the FY2026 budget for AI reflects a massive strategic shift toward implementation and national dominance, particularly within the defense sector. FY26 is viewed as the year federal agencies move from experimenting with AI to adopting "agentic" AI. The FY26 budget request included a record-breaking $13.4 billion for AI and autonomy initiatives within the DoW, the largest single-year investment in the agency's history. Consistent with these initiatives, in October 2025, we launched Xacta.ai, which we believe will reduce cyber compliance timelines through AI-driven automation.

The federal government cybersecurity and AI-related initiatives continue to evolve and may be influenced by changes in Administration policy, legislative action and regulatory developments. These changes may affect funding allocations, procurement strategies and compliance expectations. While management continues to monitor the federal government's initiatives and seeks to align the Company's capabilities accordingly, there can be no assurance that the future government priorities will not impose new compliance obligations, or technological advancements that will require for additional investment or affect the Company's ability to compete for or perform under government contracts.

Other Economic and Regulatory Policies

Aside from the uncertainty in the budgetary environment, the Administration put in place a number of Executive Orders and actions that have affected, and could continue to affect, many businesses. The Administration continuously evaluates federal agencies and existing government contracts, grants, and programs for affordability, efficiency, and alignment with U.S. federal government priorities. Further, the Administration continues ever-changing actions that increase, invoke new and/or rescind tariffs on various goods imported from various countries. Changes in international trade policies, including higher tariffs on imported goods and materials, may increase the procurement costs of certain IT hardware we use internally, on our contracts, or sell to our customers.

The ongoing and potential future reforms to the U.S. federal government processes, including changes to procurement rules and regulations, could transform how contracts are awarded, negotiated, and managed. These initiatives could further delay contract awards and/or result in modifications to the scope or terms of contracts we hold. At the same time, the Administration's focus on efficiency, transparency, consolidation, and accountability could lead to certain traditionally government functions being transferred to private entities. This potential transition of services to the private sector could benefit Telos, given our wide array of capabilities and advanced solutions.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law. The OBBBA includes significant changes to the Internal Revenue Code, with various provisions changing the U.S. federal income tax regulations and modifications to the Inflation Reduction Act of 2022. Further, the OBBBA significantly impacts the defense sector through substantial funding allocations and strategic investments, including specific investments in areas like AI, and provides the DoW with extended time, until 2029, to make strategic investments in the defense industrial base. Increased funding and improved tax treatment for research and development could boost targeted defense investments, scale commercial technologies for military use, and support related programs.

We continue to monitor and assess the risks and opportunities presented to us, in light of ongoing political tensions and heightened global instability that we expect to persist in the near term. Initiatives to reduce governmental spending, federal budget and debt ceiling action, and U.S. federal government policy positions, including trade policy, tax reform and/or changes to the U.S. federal government priorities, could materially impact federal spending broadly.