What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-10 compared with 2026-05-11 · 56 added, 38 removed, 92 unchanged (51% of the section changed)

5 unchanged sentences

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 Commission on March 16, 2026.

Overview and Business Environment

Telos Corporation empowers and protects the world’s most security-conscious organizations with efficient, adaptable, and secure solutions that safeguard people, systems, and information.

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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, Telos launched Xacta.ai TM , the artificial intelligence ("AI") capability at the core of the Xacta cyber GRC platform, dramatically reducing compliance time and effort.

In the fourth quarter of FY2025, Telos launched Xacta.ai TM , 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.

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We generated approximately 92% and 90% of our total revenues from contracts with U.S.

government agencies in the first quarter of fiscal year ("FY") 2026 and 2025, respectively.

government agencies in the first half of fiscal year ("FY") 2026 and 2025, respectively.

Our business performance is affected by the overall level of U.S.

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Macroeconomic Conditions

During the current quarter, 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.

During the first 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 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.

3 unchanged sentences

Financial Overview

Several key highlights of our financial performance in the first quarter of 2026 are described below.

Several key highlights of our financial performance in the second quarter of 2026 are described below.

More details are presented in our "Results of Operations" section.

1 unchanged sentence

• Operating expenses decreased by $5.4 million, or 24.9%, year-over-year due to lower stock-based compensation and ongoing disciplined cost management.

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

• Cash flow from operations improved by $2.6 million year-over-year from a $6.1 million inflow to an $8.7 million inflow, or 18.1% of revenue, primarily due to improved revenue and profitability.

• $2.2 million was deployed to repurchase approximately 0.5 million shares of the Company’s common stock at an average share price of $4.25 per share.

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

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

• Deployed $4.7 million to repurchase approximately 1.0 million shares of the Company's common stock during the quarter at an average share price of $4.50 per share.

Results of Operations

1 unchanged sentence

Consolidated Results of Operations

For the Three Months Ended

March 31, 2026 March 31, 2025 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2026 June 30, 2025 Dollar Change June 30, 2026 June 30, 2025 Dollar Change

(dollars in thousands)

9 unchanged sentences

Income (loss) before income taxes 704 (9,471) 10,175 2,745 (18,079) 20,824

(Provision for) benefit from income taxes (18) 4 (22)

Provision for income taxes (44) (46) 2 (62) (42) (20)

Net income (loss) $ 660 $ (9,517) $ 10,177 $ 2,683 $ (18,121) $ 20,804

1 unchanged sentence

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

The discussion of the changes in our revenue and profitability is covered in greater detail in the following section, "Segment Results." We generate revenue from the delivery of products and services to our customers.

The changes in our revenue and profitability are discussed 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 decreased by $5.3 million, or 24.9%, in the first quarter of 2026, compared to the same period in 2025.

Research and development ("R&D") expenses slightly declined by $0.2 million, or 13.6%, in the first quarter of 2026, compared to the same period in 2025.

Selling, general and administrative ("SG&A") expenses decreased by $5.1 million, or 25.8%, in the first quarter of 2026, compared to the same period in 2025, primarily due to lower stock-based compensation expenses.

Excluding stock-based compensation, reductions in R&D and SG&A expenses were due to ongoing cost discipline and restructuring.

As a percentage of revenue, overall operating expenses were 33.3% and 69.3% for the three months ended March 31, 2026, and 2025, respectively.

Other income increased by 24.2% in the first quarter of 2026, compared to the same period in 2025, primarily due to the refund in the current quarter of a prior year VAT claim that was previously determined to be uncollectible.

Operating Expenses

In the second quarter of 2026, operating expenses decreased by $5.4 million, or 24.9%, compared to the same quarter in 2025.

Research and development ("R&D") expenses slightly decreased by $0.2 million, or 11.0%, in the second quarter of 2026, compared to the same period in 2025.

Selling, general and administrative ("SG&A") expenses decreased by $5.3 million, or 25.9%, in the second quarter of 2026, compared to the same period in 2025, primarily due to lower stock-based compensation expenses.

Reductions in SG&A expenses, other than stock-based compensation, were due to ongoing cost discipline and restructuring.

As a percentage of revenue, overall operating expenses were 34.3% and 60.7% for the three months ended June 30, 2026, and 2025, respectively.

For the six months ended June 30, 2026, operating expenses decreased by $10.7 million, or 24.9%, compared with the same period in 2025.

R&D expenses slightly declined by $0.4 million, or 12.4%, in the first half of 2026, compared to the same period in 2025.

SG&A expenses decreased by $10.3 million, or 25.9%, in the first half of 2026, compared to the same period in 2025, primarily due to lower stock-based compensation expenses.

Reductions in SG&A expenses, other than stock-based compensation, were due to ongoing cost discipline and restructuring.

As a percentage of revenue, overall operating expenses were 33.8% and 64.6% for the six months ended June 30, 2026, and 2025, respectively.

Other income decreased by 9.4% in the second 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 2026 of a prior-year VAT claim that was previously determined to be uncollectible.

Segment Results

3 unchanged sentences

Security Solutions Segment - Financial Results

For the Three Months Ended

March 31, 2026 March 31, 2025 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2026 June 30, 2025 Dollar Change June 30, 2026 June 30, 2025 Dollar Change

(dollars in thousands)

5 unchanged sentences

Gross margin 35.4 % 34.8 % 36.0 % 38.4 %

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

For the quarter ended March 31, 2026, the Security Solutions segment gross profit increased by 52.5%, compared with the same period in 2025, due to higher segment revenues.

Segment gross margin decreased from 42.8% in 2025 to 36.7% in 2026, primarily due to revenue mix and higher non-cash infrastructure costs.

Three Months Ended June 30, 2026, Compared with Three Months Ended June 30, 2025

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

Security Solutions gross profit for the second quarter of 2026 increased by 46.0%, compared with the same period in 2025, primarily due to higher segment revenues.

Likewise, segment gross margin increased from 34.8% to 35.4% for the second quarter of 2026, compared with the same period in 2025.

Six Months Ended June 30, 2026, Compared with Six Months Ended June 30, 2025

Security Solutions segment revenue for the six months ended June 30, 2026, increased by 58.9%, compared to the same period in 2025, primarily due to the expansion of multiple large programs in Telos ID.

Segment gross profit for the six months ended June 30, 2026, increased by 49.2%, compared to the same period in 2025, due to higher segment revenues.

By contrast, segment gross margin decreased from 38.4% in 2025 to 36.0% in 2026, primarily due to higher non-cash infrastructure costs.

Table MD&A 3:

Secure Networks Segment - Financial Results

For the Three Months Ended

March 31, 2026 March 31, 2025 Dollar Change

For the Three Months Ended For the Six Months Ended

June 30, 2026 June 30, 2025 Dollar Change June 30, 2026 June 30, 2025 Dollar Change

(dollars in thousands)

5 unchanged sentences

Gross margin 17.7 % 18.1 % 24.7 % 21.2 %

For the quarter ended March 31, 2026, the Secure Networks segment revenue decreased by 63.1%, compared to the same period in 2025, primarily due to the continued ramp down of several programs within the portfolio without corresponding new business wins to backfill completed programs.

For the quarter ended March 31, 2026, the Secure Networks segment gross profit decreased by 54.4%, compared with the same period in 2025, due to lower revenue.

By contrast, segment gross margin expanded from 23.4% in the first quarter of 2025 to 28.9% in the first quarter of 2026, primarily due to program mix.

Three Months Ended June 30, 2026, Compared with Three Months Ended June 30, 2025

Secure Networks segment revenue for the three months ended June 30, 2026, decreased by 69.0%, compared to the same period in 2025, primarily due to the continued ramp down of several programs within the portfolio without corresponding new business wins to backfill completed programs.

Segment gross profit for Secure Networks for the second quarter of 2026, decreased by 69.7%, compared with the same period in 2025, primarily due to lower segment revenues.

Likewise, segment gross margin decreased from 18.1% to 17.7% for the second quarter of 2026, compared with the same period in 2025.

Six Months Ended June 30, 2026, Compared with Six Months Ended June 30, 2025

Secure Networks segment revenue for the six months ended June 30, 2026, decreased by 65.6%, compared to the same period in 2025, primarily due to the continued ramp down of several programs within the portfolio without corresponding new business wins to backfill completed programs.

Segment gross profit for the six months ended June 30, 2026, decreased by 59.9%, compared to the same period in 2025, due to lower segment revenues.

By contrast, segment gross margin expanded from 21.2% in 2025 to 24.7% in 2026, primarily due to program mix.

Liquidity and Capital Resources

1 unchanged sentence

A variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity.

As of March 31, 2026, we had cash and cash equivalents of $50.2 million and our working capital was $58.6 million.

As of June 30, 2026, we had cash and cash equivalents of $50.6 million and our working capital was $56.2 million.

We place a strong emphasis on liquidity management.

This focus gives us the flexibility for capital deployment while preserving a strong balance sheet to position us for future opportunities.

This focus gives us the flexibility to deploy capital 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.

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Net Change in Cash, Cash Equivalents, and Restricted Cash

For the Three Months Ended

March 31, 2026 March 31, 2025

For the Six Months Ended

June 30, 2026 June 30, 2025

(in thousands)

3 unchanged sentences

Net change in cash, cash equivalents, and restricted cash $ (2,532) $ 2,420

Net cash provided by operating activities for the three months ended March 31, 2026, was $8.7 million, an increase of $2.6 million 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).

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

Net cash used in financing activities for the three months ended March 31, 2026, increased by $8.8 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 increase in payment of tax withholding related to net share settlement of equity awards by $6.5 million in fiscal year 2026.

Net cash provided by operating activities for the six months ended June 30, 2026, was $17.5 million, an increase of $4.4 million, compared to the same period in 2025.

The change is attributable to favorable changes in working capital, primarily driven by 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 six months ended June 30, 2026, slightly decreased by $0.2 million, compared to the same period of the prior year, primarily due to the decreases in capital expenditures in 2026.

Net cash used in financing activities for the six months ended June 30, 2026, increased by $9.6 million, compared to the same period in 2025.

This is primarily attributable to the increases in payment of tax withholding related to net share settlement of equity awards of $7.6 million in the first 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 1 2 – Share Repurchases ), compared with $4.0 million in 2025.

Critical Accounting Policies and Estimates

2 unchanged sentences

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 three months ended March 31, 2026.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis