TELOS CORP

Results of Operations

Consolidated Results

Our business segments have different factors driving revenue fluctuations and profitability. A discussion of the changes in our net revenue and profitability is covered in greater detail under the section that follows: "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: Operating expenses increased by $10.6 million or 11.7% in 2025, compared to 2024. A goodwill impairment of $14.9 million was recorded in the fourth quarter of 2025 associated with our Secure Networks reporting unit (see Note 6 - Goodwill for more information), whereas an impairment loss on intangible assets of $6.4 million was recorded in 2024.

Research and development ("R&D") expenses decreased by $1.4 million, or 16.4% in 2025, compared to 2024. This was due to a $2.2 million reduction in amortization costs from the discontinued development of selected solutions or parts of solutions associated with the restructuring plan in 2024. This reduction was partially offset by an increase of $1.4 million in stock-based compensation. R&D restructuring expenses were approximately flat year-over-year. The remaining R&D expenses decreased by $0.6 million due to the restructuring effort in 2024 and ongoing disciplined cost management

Selling, general and administrative ("SG&A") expenses increased by $3.4 million, or 4.6%, in 2025, compared to 2024, due to a $7.6 million increase in stock-based compensation costs and $0.1 million increase in restructuring expenses. SG&A depreciation and amortization expenses were approximately flat year-over-year. These increases were partially offset by a $4.2 million reduction in the remaining SG&A expenses due to the 2024 restructuring effort and ongoing disciplined cost management.

Other income: Other income decreased by 19.8% in 2025, compared to 2024, primarily due to the change in dividend income from money market placements, partially offset by the gain on fair value adjustment of an investment and the one-time tax refund recorded in the fourth quarter of 2025.

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.

Security Solutions segment revenue increased by 94.9% in 2025, compared to 2024, primarily due to the expansion of multiple large programs in Telos ID.

Security Solutions segment gross profit increased by 108.0% in 2025, compared to 2024, primarily due to higher segment revenue and higher segment gross margin.

Security Solutions segment gross margin increased from 36.1% in 2024 to 38.5% in 2025, primarily due to the impairment loss on intangible assets in 2024 and the lower impact of depreciation and amortization expense on higher revenue. As expected, segment gross margin, excluding the impact of depreciation and amortization, stock-based compensation, restructuring expenses, and impairment on intangible assets, is down year-over-year due to revenue mix and higher non-cash infrastructure costs.

Secure Networks segment revenue decreased by 51.7% in 2025, compared to 2024, primarily due to the ramp down of several programs within the portfolio without corresponding new business wins to backfill completed programs.

Secure Networks segment gross profit decreased by 48.8% in 2025, compared to 2024, due to lower segment revenues.

By contrast, the Secure Networks segment gross margin increased from 21.4% in 2024 to 22.7% in 2025, primarily due to program mix. Segment gross margin, excluding the impact of depreciation and amortization, stock-based compensation, and restructuring expenses, is also up year-over-year due to revenue mix.