TLS 10-K & 10-Q changes, risk factors and insider trading

In your evaluation of the Company and business, you should carefully consider the risks and uncertainties as described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. These factors, as well as additional risks and uncertainties not currently known to us or that we currently believe are immaterial, may currently have, or may have, a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this Annual Report on Form 10-K as a result of the risk factors discussed below and elsewhere in this Annual Report on Form 10-K.

Our business could be negatively affected by cyber or other information security threats, breaches, threats or other disruptions.

We routinely experience cybersecurity threats, threats to our information technology infrastructure and attempts to gain access to our sensitive information, as do our customers, suppliers, prime and subcontractors, and joint venturestrategic partners. We experience similar security threats at customer sites that we operate and manage as a contractual requirement. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. While we have security measures in place to protect our data and the data of our customers or end-users of our services, our services and underlying infrastructure may in the future be materially breached or compromised as a result of the following:

•Third-party attempts to fraudulently induce employeesemployees, contractors or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data, our data or our IT systems;

To the extent possible, these risks are mitigated by our ability to maintain and improve information security governance policies, enhanced processes and internal security controls, including our ability to escalate and respond to known and potential risks. Although we have developed systems and processes designed to assess, identify, and manage material cybersecurity risks, we can provide no assurances that such systems and processes will provide absolute security. In the normal course of business, we are the target of malicious cyberattack attempts. To date, any such attempts have not been material to us, including to our reputation or business operations, or had a material financial impact, but there can be no assurance that future cyberattacks will not be material.

If our customers do not renew their subscriptions or contracts for our solutions and servicesservices, or subscriptions, and expand our relationships with them, our revenue could decline and our results of operations would be adversely impacted.

To continue to maintain and grow our business, it is important that our existing customers renew their subscriptions or contracts for our solutions and services or subscriptions when existing contract terms expire. Our customers have no obligation to renew or extend their subscriptions or contracts for our solutions or services or subscriptions after the expiration of the contractual periods, which vary in length, and in the normal course of business, some customers have elected not to renew or extend. It is difficult to predict attrition rates given the varying needs of our customer base. Our attrition rates may increase or fluctuate as a result of a number of factors, including customer dissatisfaction with our solutions or services, customers' spending levels, mix of customer base, decreases in the number of users at our customers, competition, pricing increases or changes, and deteriorating general economic conditions or budgetary constraints.

The U.S. federal government may terminate, cancel, delay, modify or curtail our contracts at any time prior to completion and, if we do not replace them, this may adversely affect our future revenues and could adversely impact our earnings.

Many of the U.S. federal government programs in which we participate, both as a contractor or subcontractor, extend for several years and include one or more base years and one or more option years. These programs are typically funded on an annual basis. Under these contracts, the U.S. federal government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, modifymodify, delay, or curtail our contracts at its convenience. Any decisions by the U.S. federal government to not exercise contract options or to terminate, cancel, delay, modify or curtail our major programs or contracts (including those on which we serve as a subcontractor) would adversely affect our revenues, revenue growth and profitability.

First, the process may be delayed or disrupted. Changes in congressional schedules, administration priorities, negotiations for program funding levels or unforeseen world events can interruptdelay or disrupt the funding for a program or contract. Second, fundsFunds for multi-year contracts can be changed in subsequent years in the appropriations process. In addition, the U.S. federal government has increasingly relied on IDIQ contracts and other procurement vehicles that are subject to a competitive bidding and funding process even after the award of the basic contract, adding an element of uncertainty to future funding levels. Delays in the funding process or changes in funding or funding priorities can impact the timing of available funds or can lead to changes in program content, delay or termination at the government's convenience.

Because we derive a substantial amount of our revenue from contracts with the federal government, either as a prime contractor or a subcontractor, changes in federal government budgetary priorities or policy shift could directly affect our financial performance. Uncertainty exists regarding how future budget and program decisions will unfold, including the spending priorities of the new U.S. presidential administration and Congress, and what challenges budget reductions will present for us and our industry generally. The current administration's efforts to reduce the size and spending of the federal government pose several potential risks to our operations. The focus on reducing government spending may lead to fewer contracts being awarded, reduced contract values, or delays in the awarding of contracts. Changes in federal priorities may result in a shift away from governance, risk and compliance software solutions, cybersecurity, and digital identity services, potentially reducing demand for our offerings.

We are dependentrely on a few key customer contracts for a significant portion of our future revenue,revenue. and aA significant reduction in goods and services or delay in implementation to one or more of these contracts would reduce or delay our future revenue and could materially affect our anticipated operating results.

A small number of our large customer contracts are expected to comprise a significant portion of our future revenue. Our business will likely be harmed if any of our key customer contracts generate less revenue than we forecast, and the termination or delay of a large contract or multiple contracts could have a material adverse effect on our revenue and profitability. Adverse events affecting the programs subject to these contracts, such as inflation, labor challenges, shortage of materials, market volatility, a significant decline in the traveling public or any significant supply chain disruption or delay, could also negatively affect our ability to process transactions under those contracts, which could adversely affect our revenue and the results of operations.

We are also substantially dependent on the continued service of our existing highly trained and skilled personnel, particularly our business development and operations group,groups, because of the complexity of our services and technologies. The technology industry is subject to substantial and continuous competition for engineers and other subject matter experts with high levels of experience in designing, developing and managing software, cybersecurity, and Internet-related services, as well as competition for sales executives, data scientists and operations personnel. Competition for skilled personnel is intense and many U.S. government programs also require contractors to have security clearances, which can be difficult and time-consuming to obtain.

Due to the competitive bidding process to obtain U.S. federal government contracts, both upon initial issuance and re-competition, and the likelihood of bid protest, we may be unable to achieve or sustain revenue growth and profitability.

Many of our U.S. federal government contracts are awarded through a competitive bidding process upon initial award and renewal, and we expect this will continue. There is often significant competition and pricing pressure as a result of this process. TheFrom time to time, the competitive bidding process presents a number of risks, including the following:

•From time to time weWe expend substantial funds and time to prepare bids and proposals for contracts that are ultimately awarded to one of our competitors;

•From time to time weWe are unable to accurately estimate the resources and costs that will be required to perform any contract we are awarded, which results in substantial cost overruns and decreased margins;

•From time to time weWe encounter expense and delay when our competitors protest or challenge awards of contracts, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in the termination, reduction or modification of the awarded contract; and

•From time to time weWe are not given the opportunity to re-compete for U.S. federal government contracts previously awarded to us, and we may incur expenses to protest such a decision and ultimately may not succeed in competing for or winning such contract renewal.

The U.S. federal government contracts for which we compete typically have multiple option periods, and if, as happens from time to time, we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. If we fail to win new contracts or to receive renewal contracts upon re-competition, itour may result in additional costsbusiness and expensesprospects will be adversely affected and possiblethat losscould ofcause revenue,our actual results to differ materially and adversely from those anticipated. In addition, we will not have an opportunity to compete for these contract opportunities again until such contracts expire.

Our ability to increase revenue from existing customers and attract new customers will depend, in part, on our ability to anticipate and respond effectively to rapid technological changes and market developments. Virtually all of the products we produce and sell are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. The government market in which we primarily operate is characterized by rapidly changing technologies. The product or program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance in part depends on our ability to identify emerging technological trends, devote adequate research and development resources, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices. If we fail to effectively anticipate, identify and respond to these changes in product or program needs in a timely manner, our business could be negatively impacted. Likewise, if we are unable to develop new products that meet customers' changing needs, future sales and earnings may be adversely affected.

We market the majority of our security solutions directly to U.S. federal government customers. The sale and implementation of our services to these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources, which adds uncertainty to our sales cycle. This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations.

We rely on the technology, infrastructure, and software applications of certain third parties in order to host or operate certain key platform features or functions of our business. Additionally, we rely on third-party computer hardware and cloud capabilities in order to deliver our solutions and services. Our business is dependent on the integrity, security and efficient operation of this technology and infrastructure, and we do not necessarily control the operation or data security of the third parties we utilize.

Moreover, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition, and results of operations could be adversely affected. TheFor example, the provisioning of additional cloud hosting capacity requires lead time. These third parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If these third parties increase pricing terms, terminate or seek to terminate our contractual relationship, establish more favorable relationships with our competitors, or change or interpret their terms of service or policies in a manner that is unfavorable with respect to us, we may be required to (among other possible consequences) transfer to other cloud providers or invest in a private cloud. In that case, we could incur significant costs and experience possible service interruption in connection with doing so, or risk loss of customer contracts if they are unwilling to accept such a change.

We depend on third parties for certain operational services and components of our products in order to fully perform under our contracts, and the failure or disruption of a third party to perform these services or provide these goods could have an adverse impact on our business.

We rely on subcontractors and other suppliers (or contracting parties) to provide materials, major components and subsystems for our products or to perform a portion of the services that we provide to our customers. Occasionally,A wefailure rely on only one or two sources of supply, which, if disrupted, could have an adverse effect on our ability to meet our commitments to customers. We depend on these subcontractors and suppliers to fulfill their contractual obligations in a timely and satisfactory manner in full compliance with customer requirements. Ifby one or more of our suppliers or subcontractorscontracting is unableparties to satisfactorilyprovide provideagreed-upon materials, components or products, or perform agreed-upon services, on a timely basis theand agreed-uponin suppliesa orcost-effective performmanner, themay agreed-uponadversely services per its contractual obligations,affect our ability to perform our obligations as a contractor may beand adversely affected,impact andour weresults mayof be exposed to liability.operations.

Generally, our customer contracts are either firm-fixed-price ("FFP") or cost-reimbursable. Under FFP contracts, which represented approximately 75% of our 2024 revenues, we receive a fixed price irrespective of the actual costs we incur, and consequently, we carry the burden of any cost overruns. Due to their nature, fixed-price contracts inherently have more risk than cost-reimbursable contracts, particularly fixed-price development contracts where the costs to complete the development stage of the program can be highly variable, uncertain and difficult to estimate. Under cost-reimbursable contracts, subject to a contract-ceiling amount in certain cases, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. In certain cases, cost-reimbursable contracts have a contract ceiling. If our costs exceed the contract ceiling and are not authorized by the customer or are not allowable under the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs and our fees may be reduced or eliminated. In addition, because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseen technological difficulties and cost overruns.

Under both types of contracts, we must accurately estimate the likely volume of work that will occur, costs and resource requirements involved, and assess the probability of completing individual transactions or milestones within the contracted time period and amount to maximize or earn profit on these contracts. In addition,Further, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in thosethese contracts, we may notincur realizeadditional theircosts fullor benefits.penalties. Cost overruns or poor cost controls could lower earnings, or may incur a net loss on a contract, and cause a negative impact on our results of operations.

Although sales to a new customer have often led to additional sales to the same customer or similarly situated customers, it is uncertain if we will achieve the same penetration and organic growth in the future, and our reputation, business, financial condition, and results of operations could be negatively impacted. As we expand into and within new and emerging markets and heavily regulated industry verticals, we will likely face additional regulatory scrutiny, risks, and burdens from the governments and agencies that regulate those markets and industries.

IfWe werely are unable to licenseon third-party technology that is used in our products and services to perform key functions,functions. If we are unable to license third-party technology or the losstechnology couldis havesubject to a security breach, without an adversealternative, effectit onmay negatively impact our revenues.business and results of operations.

From time to time, we change our pricing modelmodels in response to competition, global economic conditions, and general reductions in our customers' spending levels, pricing studies, or changes in how our solutions are broadly consumed. Similarly, as we introduce new products and services, or as a result of the evolution of our existing solutions and services, we may have difficulty determining the appropriate price structure for our products and services. Further, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, as we continue to target selling our solutions and services to larger organizations, these larger organizations may demand substantial price concessions. We may also need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local,and local governments, and foreign governments and government agencies.governments.

From time to time, in the ordinary course of business, we haveare beensubject involvedto ina variety of legal proceedings and, in the future, may be subject to lawsuits, claims, government investigations and other proceedings. These may include lawsuits and claims related to securities compliance, contracts, subcontracts, intellectual property, employment and wage claims, and other matters. Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. Those contingencies include, but are not limited to, the cost of litigation and unpredictable court decisions. Adverse outcomes with respect to litigation, or a government inquiry, or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or harm our reputation, all of which could negatively affect our business, results of operations and financial conditions.

We have in the past acquired, and may in the future seek to acquire or invest inin, complementary businesses, products or technologies to enhance our technical capabilities or otherwise capture growth opportunities.

Our long-term strategy may include identifying and acquiring, partnering with, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. Partnerships, mergers, joint ventures, acquisitions, and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to: diversion of management attention from running our existing business; possible material weaknesses in internal control over financial reporting; increased expenses, including legal, administrative and compensation expenses related to newly hired or terminated employees; increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with us; potential exposure to material liabilities not discovered in the due diligence process; potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions; and unavailability of acquisition financing or unavailability of such financing on reasonable terms.

For an overview of our business, including our business segments and a discussion of the services and products we provide, see Item 1, "Business" ofin thisPart 10-K.I Additional information regarding our segments is also presented inand Note 1816 – Segment Information of the notes to the consolidated financial statements atcontained Item 8 ofwithin this 10-K.

As discussed under Item 1A, "Risk Factors," we derive a substantial portion of our revenues from contracts and subcontracts with the U.S. federal government. Our revenues are generated from a number of contract vehiclesvehicle and task orders. The U.S. federal government has increasingly relied on contracts that are subject to a competitive bidding process (including IDIQ,BPA GSAand schedules,IDIQ OTA,Task Orders, OTAs, and other multi-awardGSA contractsschedule solicitations), resulting in greater competition and increased pricing pressure. We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process.

Over the past several years we have sought to diversify and improve our operating margins through the evolution of our business from an emphasis on product reselling to that of an advanced solutions technologies provider. Although we continue to offer resold products through our contract vehicles or our prime partners' contracts, we have focused on the transformation and growth on sellingof our software and service solutions,solutions offerings, as well as designingthe design and deliveringdelivery Telosof our manufactured and branded technologies. We believeemphasize ourleveraging contracttechnology portfolioand isinnovation, characterizedspecifically asin havingcybersecurity, lowcloud, and identity solutions, to moderatedrive financialgrowth riskand dueensure a secure and defendable network. We continue to theinvest limited number of long-term fixed-price development contracts. Our firm-fixed-price activities consist primarily of contracts for productsin and servicesdevelop atin establishedAI contractintegration, prices.enhancing For 2024automation and 2023,improving theexisting Company'ssolutions revenueto derivedmaintain froma firm-fixed-pricecompetitive contracts was 75% and 79%, respectively; time-and-material contracts was 15% and 9%, respectively; and cost-plus contracts revenue was 10% and 12%, respectively.edge.

U.S. Federal Government Budget

The primary financial performance measures we use to manage our business and monitor results of operations are revenue, gross profit, cash flow, and Adjusted EBITDA.EBITDA (a non-GAAP financial measure). We evaluate our results of operations by considering the drivers causing changes in these measures. We evaluate significant trends and fluctuations in our contract portfolio over time due to contract awards and completions, changes in customer requirements and changes in the volume of product and software sales.

Total backlog consists of the aggregate contract revenues remaining to be earned by us at a given time over the life of our contracts, whether funded or unfunded. Funded backlog consists of the aggregate contract revenues remaining to be earned at a given time, which, in the case of U.S. federal government contracts, means that they have been funded by the procuring agency. Unfunded backlog is the difference between total backlog and funded backlog and includes potential revenues that may be earned if customers exercise delivery orders and/or renewal options to continue these contracts.

Increases in backlog is a result of the award of new contracts and the renewal or extension of existing contracts. Reductions in backlog arise from the completioncompletion, modification, de-obligation, or the early termination of contracts. See the relevant industry, legal and regulatory risks under Item 1A, "Risk Factors,Factors" of this 10-K. We believe that comparisons of backlog period-to-period are difficult. We also believe that it is difficult to predict future revenue solely based on analysis of backlog. The actual timing of revenue from projects included in backlog will vary.

ASeveral numberkey highlights of factorsour havefinancial affectedperformance ourin fiscal year 20242025 results,are the most significant of which we have listeddescribed below. More details on these changes are presented below withinin our "Results of Operations" section.section below.

Our business segments have different factors driving revenue fluctuations and profitability. TheA 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.

OperatingResearch Expenses:and Operatingdevelopment ("R&D") expenses decreased by 3%$1.4 million, or 16.4% in 2024,2025, compared to 2023.2024. ResearchThis and development expenses decreased by $3.3 million in 2024, compared to 2023, primarilywas 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 and lower stock-based compensation expenses. Selling, general and administrative expenses decreased by $5.5 million in 2024,2024. comparedThis toreduction 2023, primarily due to decreased cash incentive compensation expenses. These reductions werewas partially offset by an increase of $1.4 million in impairmentstock-based losscompensation. onR&D intangiblerestructuring assetsexpenses ofwere $5.9approximately million.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.

SecureSecurity NetworksSolutions segment revenue decreasedincreased by 54%94.9% in 2024,2025, compared to 2023,2024, primarily due to the successful completionexpansion of certainmultiple large programs andin ramp-downTelos of certain programs without corresponding new business wins to backfill completed programs.ID.

Secure Networks segment gross profit decreased by 49%48.8% in 2024,2025, compared to 2023, primarily2024, due to lower revenues. By contrast, the segment gross margin increased from 19.6% in 2023 to 21.4% in 2024, primarily due to a favorable program mix and strong program management.revenues.

This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Several important factors could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company's Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange CommissionSEC on March 16, 2026.

Telos Corporation empowers and protects the world’s most security-conscious organizations with efficient, adaptable, and secure solutions that safeguard people, systems, and information. We deliver advanced capabilities across cyber governance, risk, and compliance ("GRC") with Xacta®; identity and biometric solutions; secure networks and communications; and TSA PreCheck® enrollment services. Our primary customers include the U.S. federal government, large commercial organizations, state and local governments, and global enterprises. Telos helps customers stay ahead of evolving threats, accelerate compliance, and achieve mission success. Driven by purpose and guided by our core values, we build trusted partnerships, deliver superior solutions, and help create a more secure, interconnected world.

Recently,In the fourth quarter of FY2025, Telos launched Xacta.aiTM, the artificial intelligence ("AI") capability at the core of the Xacta cyber GRC platform, dramatically reducing compliance time and effort. Xacta.ai delivers expert-level guidance and real-time insights, empowering organizations to move from reactive compliance to proactive risk management.

Our consolidated revenue is largely attributable to prime contracts or to subcontracts with prime contractors engaged in work for the U.S. federal government, with the remaining revenue attributable to state and local governments, and commercial markets. We generated approximately 93%92% and 89%90% of our total revenues from contracts with U.S. government agencies in the first quarterhalf of fiscal year ("FY") 2026 and 2025, respectively. Our business performance is affected by the overall level of U.S. government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. government. While certain administration priorities, such as cybersecurity, national security and AI, present greater opportunity for our products and services, turmoil within the federal government, including personnel and leadership turnover and budgetary uncertainty, has had the effect of lengthening our sales cycle in certain cases. We continuously monitor U.S. federal budget, legislative, and contracting trends and activities, and align our capabilities in response to these developments.

During the currentfirst quarter,half of FY2026, the global economy has continued to experience volatility arising from geopolitical developments and broader economic and financial factors, specifically including the ongoing conflict in Iran and the Middle East. This volatility has resulted in, and may be expected to continue to result in, rising energy prices, supply chain disruptions, and inflationary pressures, among other consequences. However, in part due to the importance of our offerings to our customers, the type of solutions we provide, and the nature of our largest customers, to date our business has not been materially impacted by these consequences. If global volatility continues to increase and the conflict in the Middle East is prolonged or intensifies, the economic uncertainty inherent in such global instability may affect our results of operations. Management continues to monitor this evolving geopolitical situation.

Several key highlights of our financial performance in the firstsecond quarter of 2026 are described below. More details are presented in our "Results of Operations" section.

•Net income expanded by $10.6$10.2 million, from a net loss of $8.6$9.5 million in the firstsecond quarter of 2025 to a net income of $2.0$0.7 million in the current quarter.

•Cash flow from operations improved by $2.6$1.9 million year-over-yearyear-over-year, increasing from a $6.1$6.9 million inflow in the second quarter of 2025 to an $8.7$8.8 million inflow,inflow orin 18.1%the second quarter of revenue,2026, primarily due to improved revenue and profitability.

•$2.2Deployed $4.7 million was deployed to repurchase approximately 0.51.0 million shares of the Company’sCompany's common stock during the quarter at an average share price of $4.25$4.50 per share.

Our business segments have different factors driving revenue fluctuations and profitability. The discussion of the changes in our revenue and profitability isare covereddiscussed 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.

OperatingIn the second quarter of 2026, operating expenses decreased by $5.3$5.4 million, or 24.9%, in the first quarter of 2026, compared to the same periodquarter in 2025. Research and development ("R&D") expenses slightly declineddecreased by $0.2 million, or 13.6%,11.0%, in the firstsecond quarter of 2026, compared to the same period in 2025. Selling, general and administrative ("SG&A") expenses decreased by $5.1$5.3 million, or 25.8%,25.9%, in the firstsecond quarter of 2026, compared to the same period in 2025, primarily due to lower stock-based compensation expenses. Excluding stock-based compensation, reductionsReductions in R&D and SG&A expensesexpenses, other than stock-based compensation, were due to ongoing cost discipline and restructuring. As a percentage of revenue, overall operating expenses were 33.3%34.3% and 69.3%60.7% for the three months ended MarchJune 31,30, 2026, and 2025, respectively.

Other income increaseddecreased by 24.2%9.4% in the firstsecond quarter of 2026, compared to the same period in 2025, primarily due to changes in dividend income from money market placements. However, other income for the six months ended June 30, 2026, increased by 7.5%, compared to the same period in 2025, primarily due to the refund in the current quarter2026 of a prior yearprior-year VAT claim that was previously determined to be uncollectible.

For the quarter ended March 31, 2026, the Security Solutions segment revenue for the second quarter of 2026 increased by 78.1%,43.7%, compared to the same period in 2025, primarily due to the expansion of multiple large programs in Telos ID.

ForSecurity the quarter ended March 31, 2026, the Secure Networks segmentSolutions gross profit decreasedfor the second quarter of 2026 increased by 54.4%,46.0%, compared with the same period in 2025, primarily due to lowerhigher revenue.segment Byrevenues. contrast,Likewise, segment gross margin expandedincreased from 23.4%34.8% into 35.4% for the first quarter of 2025 to 28.9% in the firstsecond quarter of 2026, primarilycompared duewith tothe programsame mix.period in 2025.

As of MarchJune 31,30, 2026, we had cash and cash equivalents of $50.2$50.6 million and our working capital was $58.6$56.2 million.

We place a strong emphasis on liquidity management. This focus gives us the flexibility forto deploy capital deployment while preserving a strong balance sheet to position us for future opportunities. We believe we have adequate funds on hand to execute our financial and operating strategy. Our overall financial position and liquidity are strong. Although no assurances can be given, we believe available cash balances and access to our revolving credit facility and Factoring Agreement are sufficient to maintain the liquidity we require to meet our operating, investing and financing needs for the next 12 months.

Net cash provided by operating activities for the threesix months ended MarchJune 31,30, 2026, was $8.7$17.5 million, an increase of $2.6$4.4 millionmillion, compared to the same period in 2025. The change is attributable to favorable changes in working capital, primarily driven by the timing of receipts from customers, and the timing of payments to vendors, coupled with higher cash earnings (i.e., net income (loss), excluding non-cash items that do not impact cash flows from operating activities)., coupled with the timing of receipts from customers and the timing of payments to vendors.

Net cash used in investing activities for the threesix months ended MarchJune 31,30, 2026, slightly decreased by $0.1$0.2 million, compared to the same period of the prior year, primarily due to the decreases in capital expenditures.expenditures in 2026.

Net cash used in financing activities for the threesix months ended MarchJune 31,30, 2026, increased by $8.8$9.6 million, compared to the same period in 2025. This is primarily attributable to the repurchases of common stock under the share repurchase program (see Note 11 – Share Repurchases) amounting to $2.2 million in the first quarter of 2026 , with no similar activity in 2025, and an increaseincreases in payment of tax withholding related to net share settlement of equity awards byof $6.5$7.6 million in fiscalthe yearfirst 2026.half of 2026, compared with $1.1 million in the same period of 2025, and the repurchase of common stock of $6.9 million in 2026 under the share repurchase program (See Note 12 – Share Repurchases), compared with $4.0 million in 2025.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates, judgments, and assumptions that affect the amounts reported. Actual results could differ from those estimates. The 2025 Form 10-K, as filed with the SEC on March 16, 2026, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the threesix months ended MarchJune 31,30, 2026.