tls-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________

FORM 10-Q


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2022


¨			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 001-08443

TELOS CORPORATION

(Exact name of registrant as specified in its charter)


Maryland						52-0880974
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

19886 Ashburn Road, Ashburn, Virginia						20147-2358
(Address of principal executive offices)						(Zip Code)

(703) 724-3800

(Registrant’s telephone number, including area code)


Title of each class	Securities registered pursuant to Section 12(b) of the Act: Trading symbol	Name of each exchange on which registered
Common stock, $0.001 par value per share	TLS	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of May 3, 2022, the registrant had outstanding 67,883,854 shares of common stock.

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TELOS CORPORATION AND SUBSIDIARIES

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PART I - FINANCIAL INFORMATION


		Page
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 202 2 and 202 1	4
	Condensed Consolidated Balance Sheets as of March 31, 202 2 and December 31, 202 1	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Periods Ended March 31, 202 2 and 202 1	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 202 2 and 202 1	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
Revenue
Services	$	48,108	$	52,058
Products	2,052		3,699
	50,160		55,757
Costs and expenses
Cost of sales - Services	29,731		39,490
Cost of sales - Products	1,558		1,798
	31,289		41,288
Selling, general and administrative expenses
Sales and marketing	5,252		3,826
Research and development	5,430		4,061
General and administrative	22,923		20,076
	33,605		27,963
Operating loss	(14,734)		(13,494)
Other income (expense)
Other income (expense)	12		(1,054)
Interest expense	(190)		(196)
Loss before income taxes	(14,912)		(14,744)
Provision for income taxes	(71)		(34)
Net loss	$	(14,983)	$	(14,778)
Net loss per share, basic	$	(0.22)	$	(0.23)
Net loss per share, diluted	$	(0.22)	$	(0.23)
Weighted-average number of common shares outstanding, basic	67,559		64,625
Weighted-average number of common shares outstanding, diluted	67,559		64,625

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(amounts in thousands)


	Three Months Ended March 31,
	2022		2021
Net loss	$	(14,983)	$	(14,778)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	29		(32)
Comprehensive loss	$	(14,954)	$	(14,810)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELOS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except shares and par value data)


	March 31, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	120,233	$	126,562
Accounts receivable, net of reserve of $211 and $116, respectively	57,734		59,844
Inventories, net of obsolescence reserve of $773 and $861, respectively	2,097		1,247
Prepaid expenses	4,898		3,329
Other current assets	2,773		732
Total current assets	187,735		191,714
Property and equipment, net of accumulated depreciation and amortization of $34,826 and $34,057, respectively	14,823		15,141
Operating lease right-of-use assets	705		852
Goodwill	17,922		17,922
Intangible assets, net	21,613		19,199
Other assets	1,223		1,253
Total assets	$	244,021	$	246,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and other accrued liabilities	35,223		34,548
Accrued compensation and benefits	8,702		6,557
Contract liabilities	7,036		6,381
Finance lease obligations – short-term	1,493		1,461
Operating lease obligations – short-term	517		564
Other current liabilities	2,082		1,430
Total current liabilities	55,053		50,941

Finance lease obligations – long-term	12,457		12,840
Operating lease liabilities – long-term	275		388
Deferred income taxes	735		723
Other liabilities	440		935
Total liabilities	68,960		65,827

Commitments and contingencies (Note 1 4)

Stockholders’ equity
Common stock, $0.001 par value, 250,000,000 shares authorized, 67,867,500 shares and 66,767,450 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	106		105
Additional paid-in capital	376,913		367,153
Accumulated other comprehensive income (loss)	2		(27)
Accumulated deficit	(201,960)		(186,977)
Total stockholders’ equity	175,061		180,254
Total liabilities and stockholders’ equity	$	244,021	$	246,081

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)


	Three Months Ended March 31,
	2022		2021
Operating activities:
Net loss	$	(14,983)	$	(14,778)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Stock-based compensation	14,298		13,670
Depreciation and amortization	1,405		1,360
Deferred income tax provision	12		9
Accretion of discount on acquisition holdback	12		—
Other noncash items	7		5
Changes in other operating assets and liabilities	(502)		(7,148)
Cash provided by (used in) operating activities	249		(6,882)

Investing activities:
Capitalized software development costs	(2,795)		(2,165)
Purchases of property and equipment	(546)		(480)
Cash used in investing activities	(3,341)		(2,645)

Financing activities:
Payments under finance lease obligations	(351)		(321)
Payment of tax withholding related to net share settlement of equity awards	(2,886)		—
Distribution to Telos ID Class B member - non-controlling interest	—		(2,436)
Cash used in financing activities	(3,237)		(2,757)

Decrease in cash and cash equivalents	(6,329)		(12,284)
Cash and cash equivalents, beginning of period	126,562		106,045

Cash and cash equivalents, end of period	$	120,233	$	93,761

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	179	$	196

Supplemental disclosures of non-cash investing activity:
Operating lease ROU assets obtained in exchange for operating lease liabilities	$	147	$	160

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELOS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(amounts in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
For the Three Months Ended March 31, 2022
Beginning balance	66,767	$	105	$	367,153	$	(27)	$	(186,977)	$	180,254
Net loss	—	—		—		—		(14,983)		(14,983)
Foreign currency translation gain	—	—		—		29		—		29
Vesting of restricted stock unit awards, net of shares withheld to cover tax withholding	1,100	1		(2,887)		—		—		(2,886)
Stock-based compensation, net of forfeitures and accrued compensation	—			12,647		—		—		12,647
Ending balance	67,867	$	106	$	376,913	$	2	$	(201,960)	$	175,061
For the Three Months Ended March 31, 2021
Beginning balance	64,625	$	103	$	270,800	$	44	$	(143,843)	$	127,104
Net loss	—	—		—		—		(14,778)		(14,778)
Foreign currency translation loss	—	—		—		(32)		—		(32)
Stock-based compensation, net of forfeitures	—	—		13,670		—		—		13,670
Ending balance	64,625	$	103	$	284,470	$	12	$	(158,621)	$	125,964

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELOS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business

Organization

Telos Corporation, together with its subsidiaries (the “Company” or “Telos” or “We”), a Maryland corporation, is a leading provider of cyber, cloud and enterprise solutions for the world's most security-conscious organizations. We own all of the issued and outstanding share capital of Xacta Corporation, a subsidiary that develops, markets and sells government-validated secure enterprise solutions to government and commercial customers. We also own all of the issued and outstanding share capital of Ubiquity.com, Inc., a holding company for Xacta Corporation. We also have a 100% ownership interest in Telos Identity Management Solutions, LLC (“Telos ID”), Teloworks, Inc. (“Teloworks”) and Telos APAC Pte. Ltd. (“Telos APAC”).

On November 12, 2020, we amended our charter to effect an approximate 0.794-for-1 reverse stock split with respect to our common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Public Offering of Common Stock

On November 19, 2020, we completed our initial public offering of shares of our common stock. We issued $17.2 million shares of our common stock at a price of $17.00 per share, generating net proceeds of approximately $272.8 million. We used approximately $108.9 million of the net proceeds in connection with the conversion of our outstanding shares of Exchangeable Redeemable Preferred Stock into the right to receive cash and shares of our common stock, $30.0 million to fund our acquisition of the outstanding Class B Units of Telos ID, and $21.0 million to repay our outstanding senior term loan and subordinated debt.

On April 6, 2021, we completed our follow-on offering of 9.1 million shares of our common stock at a price of $33.00 per share, including 7.0 million shares of common stock by certain existing stockholders of Telos. The offering generated approximately $64.3 million of net proceeds to Telos. We did not receive any proceeds from the shares of common stock sold by the selling stockholders. On April 19, 2021, we used approximately $1.3 million of the net proceeds to repurchase 39,682 shares of our common stock and $26.9 million to repurchase the warrants to purchase 900,970 shares of our common stock owned by certain affiliates of Enlightenment Capital Solution ("EnCap"). We used the remaining net proceeds for general corporate purposes.

Principles of Consolidation and Reporting

The accompanying condensed consolidated financial statements include the accounts of Telos and its subsidiaries, including Ubiquity.com, Inc., Xacta Corporation, Telos ID, Teloworks, and Telos APAC, all of whose issued and outstanding share capital is wholly-owned directly and indirectly by Telos Corporation. All intercompany transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments) and reclassifications necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). The presented interim results are not necessarily indicative of fiscal year performance for a variety of reasons, including, but not limited to, the impact of seasonal and short-term variations. We have continued to follow the accounting policies (including the critical accounting policies) set forth in the consolidated financial statements included in our 2021 Annual Report on Form 10-K filed with the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

In preparing these condensed consolidated financial statements, we have evaluated subsequent events through the date that these condensed consolidated financial statements were issued.

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Segment Reporting

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and assess performance.

During the fourth quarter of 2021, we reorganized our internal management reporting structure and the financial results evaluated by our CODM; therefore, we changed our operating segments to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we reported two reportable and operating segments: Security Solutions and Secure Networks. Our Security Solutions segment focuses on the Company's cybersecurity, cloud and identity solutions. Our Secure Networks segment provides offerings for enterprise security.

Prior period segment information has been recast to reflect the change. The segment reorganization had no impact on previously reported condensed consolidated financial results.

Basis of Comparison

Revision of Prior Year Interim Financial Statements

The Company recorded certain revisions related to the previously issued unaudited condensed consolidated financial statements. The Company considered the errors identified in accordance with the SEC's Staff Accounting Bulletin No. 99 and determined the impact was immaterial to the previously issued condensed consolidated interim financial statements. Nonetheless, the Company corrected these errors when identified in 2021.

During the third quarter of 2021, the Company identified that stock compensation for a single individual was incorrectly charged to cost of sales - services instead of general and administrative expense, of which $0.1 million was related to the first quarter of 2021.

The Company erroneously presented the $2.4 million final payment to fully acquire all membership interest of Telos ID as an operating activity on the condensed consolidated statements of cash flows. The Company corrected the presentation to properly reflect the final payment within financing activities on the consolidated statements of cash flows in the fourth quarter of 2021.

The following table reflects the impact of the correction on all affected line items of the Company's previously reported condensed consolidated financial statements for the period ended March 31, 2021 (in thousands):


	Three Months Ended March 31, 2021
	Previously Reported		Error Correction		As Adjusted
Condensed Consolidated Statement of Operations
Cost of sales - Services	$	39,602	$	(112)	$	39,490
Costs and expenses	41,400		(112)		41,288
General and administrative	19,964		112		20,076
Selling, general and administrative expenses	27,851		112		27,963


	Three Months Ended March 31, 2021
	Previously Reported		Error Correction		As Adjusted
Condensed Consolidated Statement of Cash Flows


Changes in other operating assets and liabilities	$	(9,584)	$	2,436	$	(7,148)
Cash used in operating activities	(9,318)		2,436		(6,882)
Distribution to Telos ID Class B member - non-controlling interest	—		(2,436)		(2,436)
Cash used in financing activities	(321)		(2,436)		(2,757)

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Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual results could differ from those estimates. We base our estimates on historical experience, currently available information and various other assumptions that we believe are reasonable under the circumstances. The most significant items involving management estimates include estimates of revenue recognition, allowance for credit losses, allowance for inventory obsolescence, the valuation allowance for deferred tax assets, the provision for income taxes, share-based compensation, contingencies and litigation, and valuation of intangibles and goodwill. The impact of changes in estimates is recorded in the period in which they become known.

Summary of Significant Accounting Policies

Accounts Receivable

Accounts receivable are stated at the invoiced amount, less an allowance for credit losses. The allowance for credit losses is management's best estimate of current expected credit losses over the contractual life of the accounts receivable. Accounts receivable balances are written off against the allowance for credit losses when management deems the balances uncollectible.

Receivables include billed and unbilled receivables. Unbilled receivables, substantially all of which are expected to be billed and collected within one year, are stated at their estimated realization value and consist of costs and fees billable on contract completion or the occurrence of a specific event, other than the passage of time.

Inventories

Inventories are stated at the lower of cost or net realizable value, where cost is determined using the weighted-average method. Substantially all inventories consist of purchased off-the-shelf hardware and software, and component computer parts used in connection with system integration services that we perform. Provisions have been made to reduce all obsolete, slow-moving or unsaleable inventories to their net realizable values. This provision is based on our overall obsolescence experience and our assessment of future inventory requirements. This charge is taken primarily due to the age of the specific inventory and the significant additional costs that would be necessary to upgrade to current standards, as well as the lack of forecasted sales for such inventory in the near future. Gross inventory was $2.9 million and $2.1 million as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022, it is management’s judgment that we have fully provided for any potential inventory obsolescence, which was $0.8 million and $0.9 million as of March 31, 2022 and December 31, 2021, respectively.

Software Development Costs

We account for development costs of software in accordance with Accounting Standards Codification ("ASC") Topic 985-20, “Software – Costs of Software to be Sold, Leased, or Marketed” and ASC Topic 350-40 “Internal Use Software,” depending on the intended use of the software being developed. Software development costs are capitalized and amortized over the estimated product life on a straight-line basis. The Company analyzes the net realizable value of capitalized software development costs on at least an annual basis and has determined that there is no indication of impairment of the capitalized software development costs as forecasted future sales are adequate to support the carrying values.

Income Taxes

We account for income taxes in accordance with ASC 740, “Income Taxes.” Under ASC 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Any change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. We record a valuation allowance that reduces deferred tax assets when it is "more likely than not" that deferred tax assets will not be realized.

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We follow the provisions of ASC 740 related to accounting for uncertainty in income taxes. The accounting estimates related to liabilities for uncertain tax positions require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits. If we determine it is more likely than not that a tax position will be sustained based on its technical merits, we record the impact of the position in our condensed consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. These estimates are updated at each reporting date based on the facts, circumstances and information available. We are also required to assess at each reporting date whether it is reasonably possible that any significant increases or decreases to our unrecognized tax benefits will occur during the next 12 months.

The provision for income taxes in interim periods is computed by applying the estimated annual effective tax rate against earnings before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur.

Goodwill and Intangible Assets

Goodwill is recorded for the difference between the aggregate consideration paid for an acquisition and the fair value of net tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for potential impairment. We evaluate the impairment of goodwill in accordance with ASC 350, “Intangibles - Goodwill and Other,” which requires goodwill and indefinite-lived intangible assets to be assessed on at least an annual basis, as of December 31 each year, for impairment using a fair value basis. Between annual evaluations, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, then impairment must be evaluated. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or business climate, or (2) a loss of key contracts or customers.

The goodwill impairment test is performed at the reporting unit level. The Company estimates and compares the fair value of each reporting unit to its respective carrying value, including goodwill. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit's fair value and the reporting unit's carrying value. Goodwill is amortized and deducted over a 15-year period for tax purposes.

Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Stock-Based Compensation

Under our 2016 Omnibus Long-Term Incentive Plan, as amended (the “2016 LTIP”), we have the ability to award restricted stock units with time-based vesting (“Service-Based RSUs”), and restricted stock units with performance-based vesting (“Performance-Based RSUs”) to senior executives, directors, employees and other eligible service providers. Under the 2016 LTIP, our Board of Directors or, by designation of authority, the Management Development and Compensation Committee of our Board of Directors has the discretion to establish the terms, conditions and criteria of the various awards, including the weighing and vesting schedule of Service-Based RSUs and the performance conditions applicable to the Performance-Based RSUs, including the achievement of certain financial performance criteria or price targets for our common stock. Upon vesting, Service-Based RSUs and Performance-Based RSUs will be settled in the Company’s common stock.

•Service-Based RSUs granted to eligible recipients as an incentive generally vest in installments over a period of up to three years from the date of grant. Service-based RSUs granted to senior executives in 2021 and 2022 vest in two to three annual installments from the date of grant. The grant date fair value per share is equal to the closing stock price on the date of grant.

•Performance-Based RSUs may vest upon the achievement of a defined performance target or at the end of the defined performance period from the date of grant, whichever initially occurs. The grant date fair value per share of these Performance-Based RSUs is equal to the closing stock price on the date of the grant or the fair value of the award on the grant date as determined through an independent valuation for Performance-Based RSUs with market condition. Performance-Based RSUs may vest upon the achievement of certain price targets for the Company’s common stock anytime over a three-year period from the date of grant. In order to reflect the substantive characteristics of these market condition awards, the Company employs a Monte Carlo simulation valuation model to calculate the grant date fair value and corresponding requisite service period of the award. Monte Carlo approaches are a class of computational algorithms that rely on repeated random sampling to compute their results. This approach allows the calculation of the value of such awards based on a large number of possible stock price path scenarios.

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We recognize these share-based payment transactions when services from the employees are received and recognize a corresponding increase in additional paid-in capital in our condensed consolidated balance sheets, in accordance with ASC 718, "Compensation - Stock Compensation." The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation expense for an award is recognized ratably over the requisite service period for the entire award, which is the period during which an employee is required to provide service in exchange for an award. Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense is reversed. If the performance condition is achieved prior to the completion of the requisite service period, any unrecognized compensation expense will be recognized in the period the performance condition is achieved. Compensation expense for awards with market conditions is recognized over the derived service period, or sooner, if the market condition is achieved. Previously recognized expense for awards with market conditions will never be reversed even if the market conditions is never achieved. We recognize forfeitures of share-based compensation awards as they occur. Share-based compensation expense is recognized as part of cost of sales and selling, general and administrative expenses in our condensed consolidated statements of operations.

Net Earnings (Loss) per Share

Basic net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of unvested restricted common stock and warrants.

For the period of net loss, potentially dilutive securities are not included in the calculation of diluted net earnings (loss) per share, because to do so would be anti-dilutive. Potentially dilutive securities are as follows (in common stock equivalent shares, in thousands):


	Three Months Ended March 31,
	2022 (1)	2021
Unvested restricted stock	—	3,167
Common stock warrants, exercisable at $1.665/sh.	—

SEC Form 10-Q filed by Telos Corporation