TELOS CORP

3. REVENUE RECOGNITION

The majority of our revenue is recognized over time, as control is periodically transferred to our customers, who receive and consume benefits as we perform. Revenue from transfers to customers over time accounted for 67% and 69% of our revenue for the three and nine months ended September 30, 2026, respectively, and 77% and 74% of our revenue for the three and nine months ended September 30, 2025, respectively. For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time when each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point. Revenue from transfers to customers at a point in time accounted for 33% and 31% of our revenue for the three and nine months ended September 30, 2026, respectively, and 23% and 26% of our revenue for the three and nine months ended September 30, 2025, respectively. The change in revenue mix for the nine months ended September 30, 2026, as compared to the prior period, was primarily driven by an increase in product sales volume from a significant program.

Our contracts may include various types of variable consideration and may include estimated amounts in the transaction price, based on all of the information available to us, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when any uncertainty associated with the variable consideration is resolved. We evaluate and include these estimated amounts of variable consideration in the transaction price, and as performance on these contracts is complete, we adjust our revenue when deemed necessary. No revenue adjustments were recorded during the three and nine months ended September 30, 2026, and 2025.

We provide for anticipated losses on contracts during the period when the loss is determined by recording an expense for the total expected costs that exceed the total estimated revenue for a performance obligation. We recorded animmaterial contract loss during the three and nine months ended September 30, 2026. No contract loss was recorded during the three months ended September 30, 2025, while we recorded an immaterial contract loss during the nine months ended September 30, 2025.

Disaggregated Revenues

In addition to our segment reporting, as further discussed in Note 14 – Segment Information, we disaggregate our revenues by customer and contract types. We treat sales to U.S. customers as sales within the United States, regardless of where the services are performed. Practically all of our revenues are generated from U.S. customers, while international customers are de minimis; as such, the financial information by geographic location is not presented.

A majority of the Company's revenue was derived under prime contracts and subcontracts with agencies and departments of the federal government. No other customer accounted for 10% or more of the Company's revenue during the three and nine months ended September 30, 2026, and 2025.

(1) Net of allowance for credit losses.

The changes in the Company's contract assets and contract liabilities during the current period were primarily the result of the timing differences between the Company's performance, invoicing, and customer payments. Revenue recognized for the three and nine months ended September 30, 2026, which was included in the contract liabilities balance at December 31, 2025, was $2.1 million and $10.2 million, respectively. Revenue recognized for the three and nine months ended September 30, 2025, which was included in the contract liabilities balance at December 31, 2024, was $1.2 million and $5.3 million, respectively.

As of September 30, 2026, we had approximately $84.0 million of remaining performance obligations, which we also refer to as funded backlog. We expect to recognize approximately 90% of our remaining performance obligations over the next 12 months, and the balance thereafter.