UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ______________ to ______________
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive office) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The | ||||
| The |
Securities registered pursuant to Section 12(g) of the Act: None
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 ☐
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
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☐ | |
| ☒ | 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
As of January 8, 2024, there were
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| (Amounts in thousands, except share and per share data) | 2023 | 2022 | ||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses | ||||||||
| Note and obligation receivable - current | ||||||||
| Other current assets | ||||||||
| Assets held for sale - current | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Note and obligation receivable - long-term | ||||||||
| Assets held for sale - long-term | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued liabilities | ||||||||
| Accrued payroll | ||||||||
| Contract liabilities - current | ||||||||
| Accrued warranty liability - current | ||||||||
| Operating lease liabilities - current | ||||||||
| Note payable - related party | ||||||||
| Debt - current, net of unamortized discounts and debt issuance costs | ||||||||
| Liabilities held for sale - current | ||||||||
| Total current liabilities | ||||||||
| Debt – long-term | ||||||||
| Contract liabilities – long-term | ||||||||
| Operating lease liabilities - long-term | ||||||||
| Liabilities held for sale - long-term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders’ Deficiency | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Stockholders’ Deficiency | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands, except share and per share data) | 2023 | 2022 | ||||||
| Revenue | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses (income) | ||||||||
| Research and development (1) | ||||||||
| Sales and marketing (1) | ||||||||
| General and administrative (1) | ||||||||
| Depreciation and amortization | ||||||||
| Impairment | ||||||||
| Gain on sale (SKS) (2) | ( | ) | ||||||
| Gain on the sale of assets | ( | ) | ||||||
| Total operating expenses (income), net | ( | ) | ||||||
| (Loss) income from operations | ( | ) | ||||||
| Other expense | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ( | ) | ||||||
| Loss on inducement of debt conversions | ( | ) | ||||||
| Total other expense | ( | ) | ( | ) | ||||
| (Loss) income from continuing operations | ( | ) | ||||||
| Loss from discontinued operations, net of tax | ( | ) | ||||||
| Net (loss) income | ( | ) | ||||||
| Dividend on preferred stock | ( | ) | ( | ) | ||||
| Net (loss) income attributable to common stockholders | $ | ( | ) | $ | ||||
| Net (loss) income per share | ||||||||
| $ | ( | ) | $ | |||||
| $ | $ | ( | ) | |||||
| Weighted average number of common shares outstanding | ||||||||
| (1) | |
| (2) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIENCY) EQUITY
(unaudited)
| FOR THE THREE MONTHS ENDED MARCH 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Comprehensive | Treasury Stock | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||
| (Amounts in thousands, except share data) | Shares | Amount | Shares | Amount | Capital | Income | Shares | Amount | Deficit | Deficiency | ||||||||||||||||||||||||||||||
| Balance - January 1, 2023 | $ | - | $ | - | $ | $ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | ||||||||||||||||||||||||||||||||||||||||
| Round ups pursuant to the reverse split | ||||||||||||||||||||||||||||||||||||||||
| Preferred dividend | - | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | - | $ | - | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||
| FOR THE THREE MONTHS ENDED MARCH 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Comprehensive | Treasury Stock | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||
| (Amounts in thousands, except share data) | Shares | Amount | Shares | Amount | Capital | Income | Shares | Amount | Deficit | Equity | ||||||||||||||||||||||||||||||
| Balance - January 1, 2022 | $ | - | $ | - | $ | $ | |
$ | ( |
) | $ | ( |
) | $ | |
|||||||||||||||||||||||||
| Issuance of common stock for conversion of debt | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for exercise of options | - | - | ||||||||||||||||||||||||||||||||||||||
| Preferred dividend | - | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | - | $ | - | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands, except share data) | 2023 | 2022 | ||||||
| Cash Flows From Operating Activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Loss from discontinued operations, net of tax | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Impairment | ||||||||
| Non-cash rent expense | ||||||||
| Bad debt expense | ||||||||
| Gain on sale (SKS) (1) | ( | ) | ||||||
| Gain on the sale of assets | ( | ) | ||||||
| Share-based compensation | ||||||||
| Amortization of debt discounts and debt issuance costs | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on inducement of debt conversions | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventory, net | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued interest | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Contract liabilities | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Related party notes | ( | ) | ||||||
| Other current liabilities | ||||||||
| Total Adjustments | ( | ) | ||||||
| Net Cash Provided By (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Proceeds from sale of SKS (1) | ||||||||
| Proceeds from building sale, net of transaction costs | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Net Cash Provided By Investing Activities | ||||||||
| Cash Flows From Financing Activities: | ||||||||
| Principal payment on finance lease | ( | ) | ||||||
| Proceeds from issuance of related party note | ||||||||
| Proceeds from issuance of debt | ||||||||
| Proceeds from exercise of options | ||||||||
| Preferred stock dividend | ( | ) | ||||||
| Repayment of debt | ( | ) | ||||||
| Net Cash Provided By (Used In) Financing Activities | ( | ) | ||||||
| Net Cash Used in Discontinued Operations | ( | ) | ||||||
| Net Increase (Decrease) In Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| (1) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
COMSOVEREIGN HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands, except share data) | 2023 | 2022 | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Accrual of preferred dividends not paid yet | $ | $ | ||||||
| Reclassification of assets and liabilities held for sale | $ | $ | ||||||
| Issuance of common stock for conversions of debt and interest | $ | $ | ||||||
| Recognition of operating lease right-of-use asset and liability | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
NOTE 1 DESCRIPTION OF BUSINESS
COMSovereign Holding Corp. (“COMSovereign”) and subsidiaries (collectively the “Company”) a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes in the Company’s significant accounting policies as of and for the three months ended March 31, 2023, as compared to the significant accounting policies described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022.
Basis of Presentation
The accompanying financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations and financial position for the three months ended March 31, 2023 and cash flows for the three months ended March 31, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023 or any other period. The amounts reported in the unaudited condensed consolidated financial statements, and the tables in the notes hereto, of the Quarterly Report on Form 10-Q as of March 31, 2023 and for the three months ended March 31, 2023 and 2022, are presented in United States dollars and are rounded in thousands with the exception of share and per share data. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2022 and for the year then ended, which were filed with the Securities and Exchange Commission (“SEC”) on Form 10-K on December 7, 2023.
Effective February 10, 2023, the Company enacted a 1-for-100 reverse stock split (the “2023 Split”) of the Company’s common stock. These consolidated financial statements and accompanying notes give effect to the reverse stock split as if it occurred at the beginning of the first period presented.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. These reclassifications had no effect on the previously reported results of operations or loss per share.
Correction of an Error
See Note 20 - Correction of an Error.
Principles of Consolidation
The unaudited condensed consolidated financial statements as of March 31, 2023 and December 31, 2022, and for the three months ended March 31, 2023 and 2022, include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates consist of the valuation of stock-based compensation; the valuation of the assets and liabilities acquired; the valuation of the Company’s equity securities issued in transactions; the valuation of inventory; the allowance for credit losses; the valuation of equity securities; the valuation allowance for deferred tax assets; and impairment of long-lived assets and goodwill.
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
6
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. As of March 31, 2023, the Company determined that it was not more likely than not that the reporting unit’s fair value was below its carrying amount due to a decline in the Company’s market capitalization. Accordingly, it was not necessary to perform impairment testing as of March 31, 2023. However, please see Note 20 – Correction of an Error for details related to the recognition of additional 2022 impairment expense.
In determining whether a quantitative assessment is required, the Company will evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the quantitative impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more than likely that the fair value is less than the carrying amount, the quantitative impairment test is not required. The Company bases these assumptions on its historical data and experience, industry projections, micro and macro general economic condition projections, and its expectations.
The Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches and compares it to the carrying values. For the income approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. For the market approach, the Company uses internal analyses based primarily on market comparables. The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and its expectations. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.
Discontinued Operations
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $
Assets and Liabilities Held for Sale
On March 20, 2023, the Company completed the sale of its Sky Sapience
business unit to Titan Innovations Ltd. for total consideration of $
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:
Level 1 – Observable inputs that reflect quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs may be used with standard pricing models or other valuation or internally-developed methodologies that result in management’s best estimate of fair value.
The Company utilizes fair value measurements primarily in conjunction with the valuation of assets acquired and liabilities assumed in a business combination. In addition, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable U.S. GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized.
7
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
As allowed by applicable FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently eligible financial assets or liabilities. The Company’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The Company has determined that the book value of its outstanding financial instruments as of March 31, 2023 and December 31, 2022 approximated their fair value due to their short-term nature.
Reportable Segments and Reporting Units
A reporting unit (“RU”) is a component of an operating segment that is a business activity for which discrete financial information is available and segment management regularly reviews the operating results of that component. The Company’s legal operating subsidiaries are not organized to qualify as individual segments, however, each operating entity had separate financial information and an operating manager, who oversees the business and financial activities, reporting to the Chief Operating Decision Maker (“CODM”). Therefore, during 2022, the Company operated as one reportable segment and each legal entity was deemed to be a separate reporting unit.
As of January 1, 2023, the Company began operating as a single reporting unit. As part of the Company’s restructuring, the Company integrated its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer is managing the Company and making decisions based on the Company’s consolidated operating results.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, with early adoption permitted. In October 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326): Effective Dates”, to finalize the effective date delays for private companies, not-for-profits, and smaller reporting companies applying the current expected credit losses (“CECL”) standards. The ASU is now effective for reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU on January 1, 2023 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.
NOTE 3 DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
Sovereign Plastics LLC
Sovereign Plastics is a manufacturer of plastic and metal components to third-party manufacturers based out of Colorado Springs, Colorado. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sovereign Plastics in the future as compared to the opportunities available to Sovereign Plastics in the future, and the availability of strategic alternatives. On June 13, 2022, after careful consideration, the Board of Directors unanimously approved the sale of Sovereign Plastics.
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $
Sky Sapience Ltd.
Sky Sapience was acquired on February 25, 2021 and is a manufacturer of drones with a patented tethered hovering technology that provides long-duration, mobile and all-weather Intelligence, Surveillance and Reconnaissance (ISR) capabilities to customers worldwide for both land and marine-based applications based out of Israel. The Company’s Board of Directors, in consultation with management as well as its financial and legal advisors, considered a number of factors, including the risks and challenges facing Sky Sapience in the future as compared to the opportunities available to Sky Sapience in the future, and the availability of strategic alternatives. On December 21, 2022, after careful consideration, the Board of Directors unanimously approved the sale of Sky Sapience.
8
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
On March 20, 2023, the Company completed the sale
of its Sky Sapience business unit to Titan Innovations Ltd. for total consideration of $
| Sky Sapience | ||||
| December 31, | ||||
| (Amounts in thousands, except share and per share data) | 2022 | |||
| Assets | ||||
| Cash | $ | | ||
| Inventory, net | ||||
| Prepaid and deferred expenses | ||||
| Other current assets | ||||
| Assets held for sale - current | ||||
| Property and equipment, net | ||||
| Operating lease right-of-use assets | ||||
| Intangible assets, net | ||||
| Goodwill | ||||
| Assets held for sale - long-term | ||||
| Total assets held for sale | $ | |||
| Liabilities | ||||
| Accounts payable | $ | |||
| Accrued liabilities | ||||
| Accrued payroll | ||||
| Contract liabilities - current | ||||
| Operating lease liabilities - current | ||||
| Liabilities held for sale - current | ||||
| Operating lease liabilities - long-term | ||||
| Liabilities held for sale - long-term | ||||
| Total liabilities held for sale | $ | |||
Upon the completion of the sale of SKS during the first quarter of
2023, the Company recorded a gain on sale of $
NOTE 4 GOING CONCERN
U.S. GAAP requires management to assess a company’s ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosures in certain circumstances.
The accompanying condensed consolidated financial statements and notes
have been prepared assuming the Company will continue as a going concern. For the three months ended March 31, 2023, the Company generated
cash flows from operations of $
Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund growth initiatives. Based on current cash on hand and subsequent activity as described herein (see Note 21 – Subsequent Events – Debt and Equity Developments), the Company presently only has enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of the Company’s limited cash availability, its operations have been scaled back to the extent possible (see Note 19 – Other Business Developments – Business Developments). Management continues to explore opportunities with third parties and related parties; however, it has not entered into any agreement to provide the necessary additional capital, except as disclosed herein.
The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising or profit-enhancing efforts that it may undertake, and these planned actions do not alleviate the substantial doubt. If the Company is not able to obtain additional financing on a timely basis, it may have to further delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on its business, financial condition and results of operations, and ultimately, it could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code. Determining the extent to which conditions or events raise substantial doubt about the Company’s ability to continue as a going concern and the extent to which mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and estimation by the Company. The Company makes assumptions that management’s plans will be effectively implemented but may not alleviate substantial doubt and its ability to continue as a going concern.
9
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
NOTE 5 REVENUE
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Drones | $ | $ | ||||||
| Telecom hardware | ||||||||
| Support & maintenance | ||||||||
| Software | ||||||||
| Optic repairs | ||||||||
| Consulting | ||||||||
| Total revenue | $ | $ | ||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Timing of revenue recognition: | ||||||||
| Services and products transferred at a point in time | $ | $ | ||||||
| Services and products transferred over time | ||||||||
| Total revenue | $ | $ | ||||||
The Company disaggregates revenue by source and geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Revenue by products and services: | ||||||||
| Products | $ | $ | ||||||
| Services | ||||||||
| Total revenue | $ | $ | ||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Revenue by geography: | ||||||||
| North America | $ | $ | ||||||
| International | ||||||||
| Total revenue | $ | $ | ||||||
10
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
Contract Balances
The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of March 31, 2023 and December 31, 2022, the Company did not have a material contract assets balance.
| (Amounts in thousands) | Total | |||
| Balance at December 31, 2022 | $ | |||
| New invoices not yet earned | ||||
| Revenue earned | ( | ) | ||
| Balance at March 31, 2023 | $ | |||
Of the $
NOTE 6 EARNINGS (LOSS) PER SHARE
The Company accounts for earnings or loss per share pursuant to Accounting Standards Codification (“ASC”) 260, Earnings Per Share, which requires disclosure on the financial statements of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options, restricted stock awards and warrants for each period.
Potential common shares issuable to employees, non-employees and directors upon exercise or conversion of shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss attributable to common shareholders. Stock options and warrants are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period (out-of-the-money), regardless of whether the Company is in a period of net loss attributable to common shareholders.
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible notes(1) | ||||||||
| (1) |
NOTE 7 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash is represented by operating accounts or money
market accounts maintained with insured financial institutions, including cash equivalents, defined as all short-term, highly-liquid investments
with maturities of three months or less when purchased. The Company had no cash equivalents as of March 31, 2023 and December 31, 2022,
respectively. During the year ended December 31, 2022, $
11
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
NOTE 8 ACCOUNTS RECEIVABLE, NET
| March 31, | December 31, | |||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total accounts receivable, net | $ | $ | ||||||
The Company had $
NOTE 9 INVENTORY, NET
| March 31, | December 31, | |||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventory | ||||||||
| Reserve | ( | ) | ( | ) | ||||
| Total inventory, net | $ | $ | ||||||
NOTE 10 PREPAID EXPENSES
| March 31, | December 31, | |||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Prepaid products and services | $ | $ | ||||||
| Prepaid rent and security deposit | ||||||||
| Total prepaid expenses | $ | $ | ||||||
Prepaids and deferred expenses include cash paid in advance for rent
and security deposits, inventory and other. As of March 31, 2023 and December 31, 2022, prepaid products and services were comprised of
deposits for radio inventory of $
NOTE 11 PROPERTY AND EQUIPMENT, NET
| March 31, | December 31, | |||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Shop machinery and equipment | $ | $ | ||||||
| Computers and electronics | ||||||||
| Office furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Total property and equipment | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
12
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
For the three months ended March 31, 2023 and
2022, the Company had $
On January 31, 2022, the Company sold its Tucson,
Arizona office building (the “Tucson Building”) for $
During the year ended December 31, 2022, the Company derecognized the property and equipment associated with the following transactions (see Note 13 – Leases and Note 19 – Other Business Developments for additional information):
| a) | Abandonment of Tucson Building lease – gross assets
of $ |
| b) | Sale of DragonWave-X Canada, Inc. assets – gross assets
of $ |
| c) | Transfer of Innovation Digital, LLC assets – gross
assets of $ |
The Company recognized $
NOTE 12 NOTE AND OBLIGATION RECEIVABLE
On June 21, 2022, the Company completed the sale
of its Sovereign Plastics business unit to TheLandersCompanies LLC for total consideration of $
On March 20, 2023, the Company completed the sale of its Sky Sapience
business unit to Titan Innovations Ltd. The consideration included a $
NOTE 13 LEASES
Operating Leases
| March 31, | December 31, | |||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liability | $ | $ | ||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||
| Operating leases | $ | $ | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
13
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
| Operating | ||||
| (Amounts in thousands) | Leases | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: effect of discounting | ( | ) | ||
| Present value of future minimum lease payments | ||||
| Less: current obligations under leases | ( | ) | ||
| Long-term lease obligations | $ | |||
NOTE 14 DEBT
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||
| (Amounts in thousands) | Note Reference | Maturity Date | Amount Outstanding | Interest Rate | Amount Outstanding | Interest Rate | ||||||||||||||
| Secured Notes Payable | ||||||||||||||||||||
| Secured senior convertible note payable | A | $ | % | $ | % | |||||||||||||||
| Secured senior convertible note payable | B | % | % | |||||||||||||||||
| Secured note payable | C | % | % | |||||||||||||||||
| Secured note payable | D | % | % | |||||||||||||||||
| Secured note payable | E | % | % | |||||||||||||||||
| Secured note payable | F | % | % | |||||||||||||||||
| Secured note payable | G | |||||||||||||||||||
| SBA loan | H | % | % | |||||||||||||||||
| Total secured notes payable | ||||||||||||||||||||
| Unsecured Notes Payable | ||||||||||||||||||||
| Note payable - related party | I | % | % | |||||||||||||||||
| Note payable | J | % | % | |||||||||||||||||
| Note payable | K | % | ||||||||||||||||||
| Note payable | L | % | ||||||||||||||||||
| Total notes payable | ||||||||||||||||||||
| Unsecured Convertible Notes Payable | ||||||||||||||||||||
| Convertible note payable | M | % | % | |||||||||||||||||
| Total convertible notes payable | ||||||||||||||||||||
| Total debt | ||||||||||||||||||||
| Less: unamortized discounts and debt issuance costs | ( | ) | ( | ) | ||||||||||||||||
| Total long-term debt, less discounts and debt issuance costs | ||||||||||||||||||||
| Less: current portion of debt | ( | ) | ( | ) | ||||||||||||||||
| Long-term portion of debt | $ | $ | ||||||||||||||||||
14
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
Debt activity during the three months ended March 31, 2023 included the following:
For Note F, on March 14, 2023, the Company
amended Note F to extend the maturity date to
For Note K, on January 17, 2023, the Company
sold an unsecured promissory note in the principal amount of $
For Note L, on February 1, 2023, the Company
sold an unsecured promissory note in the principal amount of $
For Note M, on May 24, 2022, the Company
received notice from counsel for holders of $
Certain agreements governing the secured notes payable, unsecured notes payable, and unsecured convertible notes payable contain customary covenants, such as limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness.
All debt agreements are subject to customary events of default. If an event of default occurs with respect to the debt agreements and is continuing, the lenders may accelerate the applicable amounts due. The Company is in default on several debt agreements and has accrued the proper penalties or disclosed any additional contingencies that resulted from the default.
| (Amounts in thousands) | Total | ||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
NOTE 15 STOCKHOLDERS’ EQUITY
Reverse Stock Split
Effective February 10, 2023, the Company enacted
a
15
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
Dividends
During the three months
ended March 31, 2023 and 2022, the Company recorded $
On or about May 25, 2022,
the Company announced that it had suspended the payment of dividends on the Series A Preferred Stock to preserve cash. Since June 20,
2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $
Common Stock
During the three months ended March 31, 2023,
the Company issued an aggregate of
During the three months ended March 31, 2022, the Company issued an
aggregate of
NOTE 16 SHARE-BASED COMPENSATION
Restricted Stock Awards
| Weighted- | ||||||||
| Average | ||||||||
| Number of | Grant Date Value | |||||||
| RSA’s | Per Share | |||||||
| RSA’s non-vested - January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited | ||||||||
| Vested | ( | ) | ||||||
| RSA’s non-vested - March 31, 2023 | $ | |||||||
During the three months ended March 31, 2023,
the Company recognized $
Stock Options
There were no stock options issued during the three months ended March 31, 2023 and 2022.
| Weighted | Weighted | |||||||||||||||
| Average Exercise | Average Contractual | Aggregate | ||||||||||||||
| Number of | Price | Life in | Intrinsic | |||||||||||||
| Options | Per Share | Years | Value | |||||||||||||
| Outstanding - December 31, 2022 | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Cancelled or Expired | ( | ) | ||||||||||||||
| Outstanding - March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable - March 31, 2023 | $ | $ | ||||||||||||||
16
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
| Options Outstanding | Options Exercisable | |||||||||||||
| Weighted | ||||||||||||||
| Exercise | Outstanding | Average | Exercisable | |||||||||||
| Price | Number of | Remaining Life | Number of | |||||||||||
| Per Share | Options | In Years | Options | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
The Company recognized $
NOTE 17 COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Management does not believe that after the final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations or cash flows, except as follows.
On January 27, 2022, a former employee filed suit
against the Company in the Tulsa County Oklahoma District Court, Case No. CJ-2022-00221. The plaintiff has alleged that she was entitled
to six months of severance pay after her employment contract was not renewed, and that her option agreements did not expire thirty days
after cessation of her employment, and claims she is owed approximately $
On June 16, 2022, the Company received notice
from certain former shareholders of SAGUNA claiming breaches of the SAGUNA stock purchase agreement and claiming that all of the former
shareholders of SAGUNA have suffered damages totaling approximately $
By notice dated July 14, 2022, the Company received
notice from a distributor that has a distribution agreement with InduraPower claiming that InduraPower, and the Company as guarantor,
has breached the distribution agreement, and are claiming approximately $
On or about July 17, 2022, the former employees
of SKS filed an insolvency request against SKS in the Nazareth District Court, Israel, No. 35035-06-22. The action represents $
On or about August 22, 2022, two former FastBack
employees filed suit against the Company, DragonWave and FastBack in the Alameda County Superior Court, California, Case No. 22CV016666.
The plaintiffs allege that their payroll was late and that the Company failed to make one payroll, failed to timely pay wages three times,
failed to pay accrued vacation time, and owes penalties under California law. Each plaintiff claimed damages of no less than $
17
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
On or about September 20, 2022, the Company was
served with a suit that was filed on or about May 27, 2022 by the holder of a Transform-X Inc. (“Transform-X”) promissory
note, suing the Company, Daniel Hodges, and Transform-X in the Richland County Court of Common Pleas, South Carolina, Case No. 2022CP4002806.
The plaintiff alleges that for $
On or about November 14, 2022, an intellectual
property law firm filed suit against the Company in the United States District Court for the Southern District of California, San Diego.
The plaintiff alleges that they performed work for the Company and its subsidiaries subsequent to September 30, 2022 and are owed approximately
$
On January 9, 2023, a former employee of a subsidiary of InduraPower, filed suit against the Company and the former CEO, Daniel Hodges, in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. The Company strongly disputes plaintiff’s allegations and intends to vigorously defend the lawsuit.
On or about January 10, 2023, a recruiting and
staffing company obtained a default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for $
See Note 21 – Subsequent Events – Litigation, Claims and Contingencies Developments for post-March 31, 2023 developments.
NOTE 18 CONCENTRATIONS
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral related to its trade accounts receivable. At March 31, 2023, accounts receivable,
net, from three customers comprised an aggregate of approximately
In addition, for the three months ended March
31, 2023, revenue from four customers individually exceeded
NOTE 19 OTHER BUSINESS DEVELOPMENTS
Nasdaq Compliance Developments
Throughout most of 2022, our common stock was
not in compliance with the $
On February 27, 2023, the Company regained compliance
with Nasdaq Listing Rule 5550(a)(2), the $
18
COMSOVEREIGN HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
On March 31, 2023, the Company filed a notice of late filing on Form 12b-25 with the SEC to report that its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) would not be timely filed. On April 18, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company has not yet filed the Form 10-K, the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the SEC. On May 17, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed the Form 10-K or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Form 10-Q”), the Company is not in compliance with Nasdaq Listing Rules. On August 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. On October 16, 2023, the Company received notice from the Listing Qualifications Staff (the “Staff”) indicating that the Staff had determined to delist the Company’s securities unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Staff’s determination was based upon the Company’s continued non-compliance with the filing requirement set forth in Nasdaq Listing Rule 5250(c)(1) because the Company had not filed its Form 10-K for the year ended December 31, 2022, and has not filed the Forms 10-Q for the periods ended March 31, 2023 and June 30, 2023. On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules.
The Company requested and obtained a hearing before the Panel as well as a further stay of any additional action by Nasdaq pending the issuance of a decision by the Panel. There can be no assurance that a favorable decision will be obtained.
If the Company fails to timely regain compliance
with the Nasdaq Listing Rule within any grace period granted by the Nasdaq Hearings Panel, the Company’s common stock, warrants
and
Business Developments
In January 2023, the Company idled the employees of RF Engineering & Energy Resource, LLC.
NOTE 20 CORRECTION OF AN ERROR
During the review of the Company’s condensed consolidated financial statements for the three months ended March 31, 2023, the Company identified errors in the reporting of historical goodwill impairment (included in impairment expense) and intangible asset impairment (included in impairment expense). The errors resulted in an understatement of impairment expense for the year ended December 31, 2022. Based on management’s evaluation of the SEC Staff’s Accounting Bulletins Nos. 99 (“SAB 99”) and 108 (“SAB 108”) and interpretations therewith, the Company concluded that the aforementioned errors were not material to the Company’s previously filed 2022 consolidated financial statements. This is further supported by the fact that all errors are of a non-cash nature, do not impact Adjusted EBITDA (earnings before income tax, depreciation and amortization, impairment expense, and stock-based compensation), and would not likely have materially impacted a reasonable investor’s opinion of the Company’s financial condition and results of operations.
| For the Three Months Ended | ||||||||||||
| Condensed Consolidated Statements of Operations: | March 31, 2023 | |||||||||||
| (Amounts in thousands) | Before Adjustment | Adjustment | As Reported | |||||||||
| Impairment | $ | $ | $ | |||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
19
NOTE 21 SUBSEQUENT EVENTS
Debt and Equity Developments
On April 13, 2023, pursuant to certain contractual
arrangements for services in exchange for a fixed number of shares of common stock of the Company, the Company issued
On May 26, 2023, pursuant to the note agreement,
$
On September 1, 2023, Dustin H. McIntire, our
CTO, loaned $
Litigation, Claims and Contingencies Developments
On or about May 22, 2023, a landlord filed suit
against the Company in the Circuit Court, Fairfax County, Virgina, Case No. 202307755, for breach of a commercial lease. The plaintiff
obtained a default judgment in the amount of approximately $
Nasdaq Compliance Developments
On June 21, 2023, the Company received a letter
from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last
30 consecutive business days, the Company’s minimum Market Value of Publicly Held Shares, as defined by Nasdaq (“MVPHS”),
of the Company’s
In accordance with Nasdaq Listing Rule 5810(c)(3)(D),
the Company has been provided a compliance period of 180 calendar days from receipt of the letter, or until December 18, 2023, to regain
compliance with the Minimum Market Value of Publicly Held Shares Requirement. To regain compliance with the Minimum Market Value of Publicly
Held Shares Requirement, the Company’s Preferred Stock MVPHS must be $
On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. As a result, the Company is required to present its views of the deficiency to the Panel in writing no later than December 22, 2023.
On December 12, 2023, the Company received notice
from Nasdaq indicating that the Staff had determined that an additional basis exists to delist the Company’s securities because
the Company reported stockholders’ equity of less than $
The Company previously requested and was granted a hearing before the Nasdaq Hearings Panel (the “Panel”), as well as a further stay of any suspension action by Nasdaq pending the issuance of a decision by the Panel and the expiration of any extension the Panel may grant to the Company following the hearing. At the hearing, the Company intends to present its plan to regain compliance with all applicable continued listing criteria and request an extension to do so. If the Panel denies the Company’s request for continued listing or if the Company is unable to evidence compliance within any extension of time that may be granted by the Panel, Nasdaq will provide written notification that the Company’s securities will be delisted and, as such, there can be no assurance that the Company will be able to maintain the listing of its securities on Nasdaq.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this Quarterly Report to “Company, “we”, “us” and “our” refer to the COMSovereign Holding Corp. and its subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations,” contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. From time to time in the future, we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical fact, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Readers should carefully review the risk factors included under “Item 1A. Risk Factors” that are included in our fiscal 2022 Annual Report on Form 10-K filed with the U. S. Securities and Exchange Commission (the “SEC”) on December 7, 2023.
Overview of Business; Operating Environment and Key Factors Impacting Our Operating Results
The following MD&A is intended to help readers understand the results of our operations and financial condition and is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes (“Notes”) in Part 1 of this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to the three months ended March 31, 2023, compared to the three months ended March 31, 2022, unless otherwise indicated.
Business Overview
We are a provider of solutions to network operators, mobile device carriers, governmental units and other enterprises worldwide. We have assembled a portfolio of communications and portable infrastructure technologies, capabilities and products that enable the upgrading of latent 3G networks to 4G and 4G-LTE networks and will facilitate the rapid roll out of the 5G and 6G networks of the future. We focus on novel capabilities, including signal modulations, antennae, software, hardware and firmware technologies that enable increasingly efficient data transmission across the electromagnetic spectrum. Our product solutions are complemented by a broad array of services, including technical support, systems design and integration, and sophisticated research and development programs. While we compete globally on the basis of our innovative technology, the breadth of our product offerings, our high-quality cost-effective customer solutions, and the scale of our global customer base and distribution, our primary focus is on the North American telecom infrastructure and service market. We believe we are in a unique position to rapidly increase our near-term domestic sales as we are among the few U.S. based providers of telecommunications equipment and services.
We provide the following categories of product offerings and solutions to our customers:
| ● | Wireless Transport Solutions. We offer a line of high-capacity packet microwave solutions that drive next-generation intellectual property (“IP”) networks. Our carrier-grade point-to-point packet microwave systems transmit broadband voice, video and data. Our solutions enable service providers, government agencies, enterprises and other organizations to meet their increasing bandwidth requirements rapidly and affordably. The principal application of our product portfolio is wireless network transport, including a range of products ideally suited to support the emergence of underlying small cell networks. Additional solutions include leased-line replacement, last mile fiber extension and enterprise networks. |
| ● | Edge Compute Capable 4G LTE and 5G Network in a Box. We offer both 4G/LTE and 5G New Radio (“NR”) based Network in a Box capable of connecting to other access radios or directly to mobile devices such as mobile phones and other Internet-of-things devices. The all-in-one mobile networks support edge-based application hosting and enable third-party service integration. |
| ● | Tethered Drones and Aerostats. We design, manufacture, sell and provide logistical services for specialized tethered aerial monitoring and communications platforms serving national defense and security customers for use in applications such as intelligence, surveillance, and reconnaissance (“ISR”) and tactical communications. We focus primarily on a suite of tethered aerostats known as the Winch Aerostat Small Platform, which are principally designed for military and security applications and provide secure and reliable aerial monitoring for extended durations while being tethered to the ground via a high-strength armored tether. |
21
We are also developing processes that we believe will significantly advance the state-of-the-art in silicon photonic (“SiP”) devices for use in advanced data interconnects, communication networks and computing systems. We believe our novel approach will allow us to overcome the limitations of current SiP optical modulators, dramatically increase computing bandwidth, and reduce drive power while offering lower operating costs. In addition, we are seeking to leverage our AI capabilities in our Non-Line of Sight (NLOS) unlicensed radio enhancing and extending these capabilities to further support our customers’ environments while expanding and extending our footprint of AI capabilities through new partnerships.
Our engineering and management teams have extensive experience in optical systems and networking, digital signal processing, large-scale application-specific integrated circuit design and verification, SiP design and integration, system software development, hardware design, high-speed electronics design and network planning, installation, maintenance, and servicing. We believe this broad expertise in a wide range of advanced technologies, methodologies, and processes enhances our innovation, design and development capabilities, and has enabled us, and we believe will continue to enable us, to develop and introduce future-generation communications and computing technologies. In the course of our product development cycles, we engage with our customers as they design their current and next-generation network equipment in order to gauge current and future market needs.
Our Business
Our CORE business is comprised of the following products:
| ● | Licensed Microwave (formerly operated as DragonWave-X LLC). DragonWave-X, LLC and its operating subsidiaries, DragonWave Corp. and DragonWave-X Canada, Inc. (collectively, “DragonWave”)), are a manufacturer of high-capacity microwave and millimeter wave point-to-point telecom backhaul radio units. DragonWave and its predecessor have been selling telecom backhaul radios since 2012 and its microwave radios have been installed in over 330,000 locations in more than 100 countries worldwide. According to a report of the U.S. Federal Communications Commission, as of December 2019, DragonWave was the second largest provider of licensed point-to-point microwave backhaul radios in North America. DragonWave was acquired by ComSovereign in April 2019 prior to the ComSovereign Acquisition. On May 23, 2022, the Company sold the assets of DragonWave’s Canadian subsidiary, and transferred the related employees and assigned the Canadian lease of DragonWave’s Canadian subsidiary, to a third party. |
| ● | 4G and 5G Edge Compute (formerly Virtual NetCom, LLC). Virtual NetCom, LLC (“VNC”)) is an edge compute focused wireless telecommunications technology developer and equipment manufacturer of both 4G LTE Advanced and 5G NR capable radio equipment. VNC designs, develops, manufactures, markets, and supports a line of network products for wireless network operators, mobile virtual network operators, cable TV system operators, and government and business enterprises that enable new sources of revenue, and reduce capital and operating expenses. We acquired the product (formerly VNC) in July 2020. |
| ● | Unlicensed Microwave (formerly FastBack). Skyline Partners Technology LLC, which conducted business under the name Fastback Networks (“Fastback”)), is a manufacturer of intelligent backhaul radio (“IBR”) systems that deliver high-performance wireless connectivity to virtually any location, including those challenged by Non-Line of Sight limitations. Fastback’s advanced IBR products allow operators to economically add capacity and density to their existing cellular networks and expand service coverage density with small cells. These solutions also allow operators to both provide temporary cellular and data service utilizing mobile/portable radio systems and provide wireless Ethernet connectivity. We acquired Fastback in January 2021. |
| ● | Engineering Services (formerly Silver Bullet Technology, Inc.) enables us to provide engineering services including the design and develop of next generation network systems and components, including large-scale network protocol development, software-defined radio systems and wireless network designs. ComSovereign acquired Silver Bullet in March 2019 prior to the ComSovereign Acquisition. |
| ● | Mobile Edge Compute (formerly SAGUNA Networks Ltd.) based in Yokneam, Israel, is the software developer behind the award-winning SAGUNA Edge Cloud, which transforms communication networks into powerful cloud-computing infrastructures for applications and services, including augmented and virtual reality, Internet of Things (“IoT”), edge analytics, high-definition video, connected cars, autonomous drones and more. SAGUNA allows these next-generation applications to run closer to the user in a wireless network, dramatically cutting down on latency, which is a fundamental and critical requirement of 5G networks. SAGUNA’s Edge Cloud operates on general purpose computing hardware but can be optimized to support the latest artificial intelligence and machine learning features through dedicated accelerators. We acquired SAGUNA in October 2021. In order to conserve cash, SAGUNA idled the employees in June 2022. |
Our NONCORE business is comprised of the following products:
| ● | Drones (formerly Lighter Than Air Systems Corp., which did business under the name Drone Aviation) based in Jacksonville, Florida develops and manufactures cost-effective, compact and enhanced tethered unmanned aerial vehicles, including Lighter-Than-Air aerostats and drones that support surveillance sensors and communications networks. We acquired Drone Aviation in June 2014. |
| ● | Silicon Photonics (formerly VEO Photonics, Inc.) based in San Diego, California, is a research and development group innovating SiP technologies for use in copper-to-fiber-to-copper switching, high-speed computing, high-speed ethernet, autonomous vehicle applications, mobile devices and 5G wireless equipment. ComSovereign acquired VEO in January 2019 prior to the ComSovereign Acquisition. In order to conserve cash, VEO idled the employees in June 2022. |
As part of the Company’s restructuring, commencing January 1, 2023, the Company integrated its previously separate reporting units, including employing a single integrated sales function, and the Chief Executive Officer manages the Company and makes decisions based on the Company’s consolidated operating results.
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Nasdaq Compliance Developments
As previously disclosed in our Form 10-K filed on December 7, 2023, we are not in compliance with Nasdaq Continued Listing Rules. Throughout most of 2022, our common stock was not in compliance with the $1.00 minimum closing bid price requirement. We were given grace periods and regained compliance on or about February 27, 2023, by having the closing bid price of our common stock exceed $1.00 for a minimum of ten (10) consecutive trading days during the grace period by implementing a 1-for-100 reverse stock split of our outstanding common stock on February 10, 2023.
On February 27, 2023, the Company regained compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement (“minimum bid price”) price of the Company’s common stock, and Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports (“filing requirements”) with the Securities and Exchange Commission (“SEC”) following the successful filing of its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022.
On March 31, 2023, the Company filed a notice of late filing on Form 12b-25 with the SEC to report that its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) would not be timely filed. On April 18, 2023, the Company received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because the Company has not yet filed the Form 10-K, the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the SEC. On May 17, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed the Form 10-K or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, the Company is not in compliance with Nasdaq Listing Rules. On August 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. On October 16, 2023, the Company received notice from the Listing Qualifications Staff (the “Staff”) indicating that the Staff had determined to delist the Company’s securities unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”). The Staff’s determination was based upon the Company’s continued non-compliance with the filing requirement set forth in Nasdaq Listing Rule 5250(c)(1) because the Company had not filed its Form 10-K for the year ended December 31, 2022, and has not filed the Forms 10-Q for the periods ended March 31, 2023 and June 30, 2023. On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules.
On June 21, 2023, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the Company’s minimum Market Value of Publicly Held Shares, as defined by Nasdaq (“MVPHS”), of the Company’s 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock (“Preferred Stock”) has been below the minimum $1 million requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5555(a)(4) (the “Minimum Market Value of Publicly Held Shares Requirement”). Under Nasdaq rules, the Company will have the opportunity to appeal the delisting decision to a Nasdaq Hearings Panel. There can be no assurance that, if the Company decides to appeal the delisting determination, such appeal would be successful.
In accordance with Nasdaq Listing Rule 5810(c)(3)(D), the Company has been provided a compliance period of 180 calendar days from receipt of the letter, or until December 18, 2023, to regain compliance with the Minimum Market Value of Publicly Held Shares Requirement. To regain compliance with the Minimum Market Value of Publicly Held Shares Requirement, the Company’s Preferred Stock MVPHS must be $1 million or more for a minimum of 10 consecutive business days during the compliance period ending on December 18, 2023. There can be no assurance that the Company will be able to regain compliance with either listing requirement.
On November 16, 2023, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, the Company is not in compliance with Nasdaq Listing Rules. As a result, the Company is required to present its views of the deficiency to the Panel in writing no later than December 22, 2023.
On December 12, 2023, the Company received notice from Nasdaq indicating that the Staff had determined that an additional basis exists to delist the Company’s securities because the Company reported stockholders’ equity of less than $2,500,000 in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is the minimum requirement set forth in Nasdaq Listing Rule 5550(b)(1), and did not otherwise satisfy the alternative minimum requirements for market value of listed securities or net income from continuing operations.
The Company previously requested and was granted a hearing before the Nasdaq Hearings Panel (the “Panel”), as well as a further stay of any suspension action by Nasdaq pending the issuance of a decision by the Panel and the expiration of any extension the Panel may grant to the Company following the hearing. At the hearing, the Company intends to present its plan to regain compliance with all applicable continued listing criteria and request an extension to do so. If the Panel denies the Company’s request for continued listing or if the Company is unable to evidence compliance within any extension of time that may be granted by the Panel, Nasdaq will provide written notification that the Company’s securities will be delisted and, as such, there can be no assurance that the Company will be able to maintain the listing of its securities on Nasdaq.
23
Significant Components of Our Results of Operations
Revenues
Our revenues are generated primarily from the sale of our products, which consist primarily of telecom hardware, repairs, support & maintenance, drones, consulting, warranties and other. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met.
During the three months ended March 31, 2023 and 2022, approximately 0% and 16%, respectively, of our revenues were derived from sales outside of the United States. While our near-term focus is on the North American telecom and infrastructure and service market, a key element of our growth strategy is to expand our worldwide customer base and our international operations, initially through agreements with third-party resellers, distributors and other partners that can market and sell our products in foreign jurisdictions. We expect that over the short term our percentage of sales outside the United States may increase as we build up our domestic sales and service teams. Notwithstanding such percentage increase, we expect the sales of tethered aerostats and drones will primarily be to the domestic market customers, primarily to the U.S. government and its agencies, even if such systems are for integration into foreign locations.
Cost of Goods Sold and Gross Profit
Our cost of goods sold is comprised primarily of the costs of manufacturing products, procuring finished goods from our third-party manufacturers, third-party logistics and warehousing provider costs, shipping and handling costs and warranty costs. We presently outsource the manufacturing of our FastBack and DragonWave products to two outsourced manufacturers, SMC for FastBack products and Benchmark for DragonWave products. Cost of goods sold also includes costs associated with supply operations, including personnel-related costs, provision for excess and obsolete inventory, third-party license costs and third-party costs related to the services we provide. Additionally, cost of goods sold does not include any depreciation and amortization expenses as we separate depreciation and amortization expense into its own category within operating expenses.
Gross profit has been and will continue to be affected by various factors, including changes in our supply chain and evolving product mix. The margin profile of our current products and future products will vary depending on operating performance, features, materials, manufacturer, and supply chain. Gross margin will vary as a function of product mix, changes in pricing due to competitive pressure, our third-party manufacturing, our production costs, costs of shipping and logistics, provision for excess and obsolete inventory and other factors. We expect our gross margins will fluctuate from period to period depending on the interplay of these various factors.
Operating Expenses
We classify our operating expense as research and development, sales, and marketing, and general and administrative. Personnel costs are the primary component of each of these operating expense categories, which consist of cash-based personnel costs, such as salaries, sales commissions, benefits, and bonuses. Additionally, we separate depreciation and amortization expense into its own category.
Research and Development
In addition to personnel-related costs, research and development expense consists of costs associated with the design, development, and certification of our products. We generally recognize research and development expense as incurred. Development costs incurred prior to establishment of technological feasibility are expensed as incurred.
Sales and Marketing
In addition to personnel costs for sales, marketing, service and product management personnel, sales and marketing expense consists of the expenses associated with our training programs, trade shows, marketing programs, promotional materials, demonstration equipment, national and local regulatory approvals of our products, travel, entertainment and recruiting. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales, marketing, service, and product management organization in support of our investment in our growth opportunities, whether through the development and rollout of new or modified products or through acquisitions and partnerships.
General and Administrative
In addition to personnel costs, general and administrative expenses consist of professional fees, such as legal, audit, accounting, information technology and consulting fees; share-based compensation; and facilities and other supporting overhead costs.
Depreciation and Amortization
Depreciation and amortization expense consists of depreciation related to fixed assets such as test equipment, research and development equipment, computer hardware, production fixtures and leasehold improvements, as well as amortization related to definite-lived intangibles.
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Impairment Expense
We account for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. During the fourth quarter of 2020, we adopted ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Impairment expense is recorded when the carrying value of a reporting unit (including goodwill and intangibles) exceeds the fair value of the reporting unit.
Gain or Loss on Sales
A gain or loss on sales is recognized on sales of legal entities or sales of long-lived assets and included in income from continuing operations in the income statement. The amount of consideration promised in a contract that is included in the calculation of a gain or loss includes both the transaction price and the carrying amount of liabilities assumed.
Gain on the Sale of Assets
A gain or loss is recognized on the sale and leaseback of long-lived assets and included in income from continuing operations in the income statement. The amount of consideration promised in a contract that is included in the calculation of a gain or loss includes the transaction price and the carrying amount of assets acquired, liabilities assumed, and closing costs.
Interest Expense
Interest expense is comprised of interest expense associated with our secured notes payables, unsecured notes payables and unsecured convertible notes payables. The amortization of debt discounts is also recorded as part of interest expense.
Results of Operations
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| (Amounts in thousands, except share and per share data) | 2023 | 2022 | ||||||
| Revenue | $ | 483 | $ | 2,053 | ||||
| Cost of goods sold | 301 | 1,483 | ||||||
| Gross profit | 182 | 570 | ||||||
| Operating expenses (income) | ||||||||
| Research and development (1) | 57 | 1,172 | ||||||
| Sales and marketing (1) | - | 66 | ||||||
| General and administrative (1) | 2,179 | 5,780 | ||||||
| Depreciation and amortization | 69 | 741 | ||||||
| Impairment | 896 | - | ||||||
| Gain on sale (SKS) (2) | (454 | ) | - | |||||
| Gain on the sale of assets | - | (8,441 | ) | |||||
| Total operating expenses (income), net | 2,747 | (682 | ) | |||||
| (Loss) income from operations | (2,565 | ) | 1,252 | |||||
| Other expense | ||||||||
| Interest expense | (419 | ) | (879 | ) | ||||
| Loss on extinguishment of debt | - | (173 | ) | |||||
| Loss on inducement of debt conversions | (1,946 | ) | - | |||||
| Total other expense | (2,365 | ) | (1,052 | ) | ||||
| (Loss) income from continuing operations | (4,930 | ) | 200 | |||||
| Loss from discontinued operations, net of tax | - | (64 | ) | |||||
| Net (loss) income | $ | (4,930 | ) | $ | 136 | |||
| (1) | These are exclusive of depreciation and amortization |
| (3) | Sky Sapience (“SKS”) |
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Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Total Revenues
For the three months ended March 31, 2023 total revenues were $0.5 million compared to $2.1 million for the three months ended March 31, 2022. The decrease of $1.6 million, or 76%, primarily consisted of decreases in our mobile network backhaul products and aerostat products and accessories due to the Company’s liquidity challenges and idling and sales of businesses.
Cost of Goods Sold and Gross Profit
For the three months ended March 31, 2023, cost of goods sold was $0.3 million compared to $1.5 million for the three months ended March 31, 2022. The decrease of $1.2 million, or 80%, is primarily due to reduced revenues. The Company sells multiple products with varying profit margins. The product mix had higher margins during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Gross profit for the three months ended March 31, 2023 was $0.2 million compared to $0.6 million for the three months ended March 31, 2022. The decrease in gross profit margin of $0.4 million, or 68%, was driven primarily by decreased revenues during the current quarter compared to the corresponding period in fiscal year 2022.
Research and Development Expense
For the three months ended March 31, 2023, research and development expense was $0.1 million compared to $1.2 million for the three months ended March 31, 2022. The decrease of $1.1 million consisted primarily of contract labor and payroll related costs due to the suspension of research and development activity as a result of liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Sales and Marketing Expense
For the three months ended March 31, 2023, sales and marketing expense was $0.0 million compared to $0.1 million for the three months ended March 31, 2022. The decrease of $0.1 million primarily consisted of decreases in sales costs and cutbacks due to the Company’s liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
General and Administrative Expenses
For the three months ended March 31, 2023, general and administrative expense was $2.2 million compared to $5.8 million for the three months ended March 31, 2022. The decrease of $3.6 million primarily consisted of decreases in payroll and professional expenses attributable to cost reductions due to our liquidity challenges.
While costs have recently been reduced due to the Company’s liquidity challenges, management expects that these costs will increase modestly as liquidity improves and the Company expands resources somewhat in order to focus on revenue enhancement.
Depreciation and Amortization
For the three months ended March 31, 2023, depreciation and amortization was $0.1 million compared to $0.7 million for the three months ended March 31, 2022. The decrease of $0.6 million was primarily due to the sale of our Tucson Building (see Note 11 – Property and Equipment, Net) and equipment during early 2022.
Impairment Expense
For the three months ended March 31, 2023 the Company recorded impairment expense of $0.9 million in connection with the impairment of its goodwill and intangible assets (see Note 20 – Correction of an Error).
Gain on Sale of SKS
For the three months ended March 31, 2023, there was a gain of $0.5 million due to the sale of SKS comprised of a note receivable for $0.6 million and cash proceeds of $0.5 million, partially offset by net assets of $0.6 million and closing costs in connection with the sale of $0.1 million.
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Gain on the Sale of Assets
For the three months ended March 31, 2022 there was a gain of $8.4 million due to the sale of our Tucson Building (see Note 13 – Leases) and equipment.
Other Expense
For the three months ended March 31, 2023, other expense was $2.4 million compared to $1.1 million for the three months ended March 31, 2022. The increase of $1.3 million primarily consisted of an increase in loss on inducement of debt conversions of $1.9 million offset by decreases in the loss on extinguishment of debt of $0.2 million and interest expense of $0.4 million.
(Loss) Income from Continuing Operations
For the three months ended March 31, 2023, we had a net loss from continuing operations of $4.9 million compared to net income from continuing operations of $0.2 million for the three months ended March 31, 2022, related to the items described above.
Loss from Discontinued Operations
For the three months ended March 31, 2023, we had a net loss from discontinued operations of $0 compared to a net loss from discontinued operations of $0.1 million for the three months ended March 31, 2022.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its cash requirements. As of March 31, 2023, we had $3.1 million in cash compared to $1.9 million on December 31, 2022, an increase of $1.2 million resulting primarily from $0.6 million of cash provided by operating activities, $0.4 million of cash provided by the sale of SKS (see Note 3 – Discontinued Operations and Assets and Liabilities Held for Sale), and $0.2 million of proceeds from debt.
As of March 31, 2023, we had a working capital deficit of $16.3 million compared to a working capital deficit of $15.9 million as of December 31, 2022.
As of March 31, 2023, we had undiscounted obligations relating to the payment of indebtedness as follows:
| ● | $11.8 million related to indebtedness that is due during the remainder of 2023; and |
| ● | $0.6 million related to indebtedness that is due during 2024. |
Subsequent to March 31, 2023, the following developments should be noted:
| ● | an additional promissory note with a face value of $0.3 million was issued. |
Our future capital requirements for our operations will depend on many factors, including the profitability of our businesses, and the costs of our operations. We cannot be sure that any additional funding, if needed, will be available. Any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership and could also result in a decrease in the market price of our common stock. Debt financing, if available, may subject us to restrictive covenants and significant interest costs.
Going Concern
The accompanying unaudited condensed consolidated financial statements and notes have been prepared assuming that we will continue as a going concern. At March 31, 2023, we had an accumulated deficit of $302.5 million and we had a working capital deficit of $16.3 million. These factors raise substantial doubt about our ability to continue as a going concern.
Our historical operating results, accumulated deficit and working capital, among other factors, raise substantial doubt about our ability to continue as a going concern. Based on our current cash on hand and subsequent activity as described herein, we presently only have enough cash on hand to operate on a month-to-month basis, without raising additional capital or selling assets. Because of our limited cash availability, our operations have been scaled back to the extent possible. We continue to explore opportunities with third parties and related parties to provide additional capital; however, we have not entered into any agreement to provide the necessary capital. In the near term, there will be limited opportunities to raise capital of significance until our Nasdaq compliance issues are resolved, as discussed in Nasdaq Compliance Developments herein.
We will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet our future liquidity requirements. However, there can be no assurance that we will be successful in any capital-raising efforts that we may undertake, and these planned actions do not alleviate the substantial doubt. If we are not able to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions, which would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we could be forced to discontinue operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code. Determining the extent to which conditions or events raise substantial doubt about the Company’s ability to continue as a going concern and the extent to which mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and estimation by the Company. The Company makes assumptions that management’s plans will be effectively implemented but may not alleviate substantial doubt and its ability to continue as a going concern.
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Sources and Uses of Cash
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| (Amounts in thousands) | 2023 | 2022 | ||||||
| Cash flows provided by (used in) operating activities | $ | 589 | $ | (8,462 | ) | |||
| Cash flows provided by investing activities | 436 | 14,909 | ||||||
| Cash flows provided by (used in) by financing activities | 170 | (7,587 | ) | |||||
| Net cash used in discontinued operations | - | (335 | ) | |||||
| Net increase (decrease) in cash | $ | 1,195 | $ | (1,475 | ) | |||
Operating Activities
For the three months ended March 31, 2023, net cash provided by operating activities was $0.6 million. Net cash provided by operating activities primarily consisted of net loss from continuing operations of $4.9 million, which was partially offset by adjustments for non-cash expenses of $3.1 million and net cash used to fund changes in the levels of operating assets and liabilities of $2.5 million.
For the three months ended March 31, 2022, net cash used in operating activities was $8.5 million. Net cash used in operating activities primarily consisted of the net income from continuing operations of $0.2 million, which was offset by deductions for non-cash income of $6.1 million, and net cash used to fund changes in the levels of operating assets and liabilities of $2.6 million.
Investing Activities
For the three months ended March 31, 2023, net cash provided by investing activities was $0.4 million. Investing activities consisted of proceeds from the sale of SKS of $0.4 million.
For the three months ended March 31, 2022, net cash provided by investing activities was $14.9 million. Investing activities primarily consisted of proceeds from the building sale of $15.1 million, which was partially offset by the acquisition of property and equipment of $0.2 million.
Financing Activities
For the three months ended March 31, 2023, net cash provided by financing activities was $0.2 million. Financing activities consisted of proceeds of debt of $0.2 million.
For the three months ended March 31, 2022, net cash used in financing activities was $7.6 million. Financing activities primarily consisted of repayment of debt of $7.6 million.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required under Regulation S-K for smaller reporting companies.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our Chief Executive Officer and Acting Principal Financial and Accounting Officer has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Acting Principal Financial and Accounting Officer has concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management concluded that the following material weaknesses that were first identified in 2021, continued to exist in our disclosure controls and procedures:
| ● | we do not effectively segregate certain accounting duties due to the small size of our accounting staff; |
| ● | there is a lack of timely reconciliations of account balances; and |
| ● | there is a lack of documented and tested internal controls to meet the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002. |
Our remediation of the material weaknesses in our internal control over financial reporting is ongoing.
(b) Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Neither our Company nor any of our subsidiaries currently is a party to any legal proceeding that, individually or in the aggregate, is material to our Company as a whole, except as disclosed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on December 7, 2023 and as follows.
On January 9, 2023, a former employee of a subsidiary of InduraPower, filed suit against the Company and the former CEO, Daniel Hodges, in the Pima County Superior Court, Arizona, Case No. C20230116. The plaintiff has alleged that he is owed for unpaid minimum wages and overtime wages, breach of employment contract, retaliatory termination, and alleges an unspecified amount in damages. The Company filed an answer to the complaint and the proceedings are currently in the discovery phase. The Company strongly dispute plaintiff’s allegations and intends to vigorously defend the lawsuit.
On or about January 10, 2023, a recruiting and staffing company obtained a default judgment against the Company in County Court, Collin County, Texas, Case No. 004-01539-2022, for $145,917 and post-judgment interest at 7%. As of March 31, 2023, the Company accrued for the full amount of the judgment. The judgment holder obtained a garnishment order against Company’s banking accounts and has received approximately $17,600 in cash through the date of this filing.
On or about May 22, 2023, a landlord filed suit against the Company in the Circuit Court, Fairfax County, Virgina, Case No. 202307755, for breach of a commercial lease. The plaintiff obtained a default judgment in the amount of approximately $130,000 which remains unpaid as of the date of this filing. As of March 31, 2023, the Company accrued for the full amount of the judgment in accrued liabilities on the condensed consolidated balance sheet.
Item 1A. Risk Factors
Readers should carefully review the risk factors included under “Item 1A. Risk Factors” of our fiscal 2022 Annual Report on Form 10-K filed with the SEC on December 7, 2023.
Our stockholders’ equity fails to meet the minimum requirement for continued listing requirements of the Nasdaq Capital Market. Our ability to publicly or privately sell equity securities and the liquidity of our common stock could be adversely affected if we are delisted from the Nasdaq Capital Market.
On December 12, 2023, the Company received written notice from Nasdaq that because the Company’s stockholders’ equity as reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 was ($15,001,000), we do not meet the minimum stockholders’ equity requirement of $2,500,000 as set forth in Nasdaq Listing Rule 5550(b)(1), and do not otherwise satisfy the alternative minimum requirements for market value of listed securities ($35 million) or net income from continuing operations ($500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years), and therefore the Company’s securities are subject to delisting.
The Company previously requested and was granted a hearing before the Nasdaq Hearings Panel (the “Panel”), as well as a further stay of any suspension action by Nasdaq pending the issuance of a decision by the Panel and the expiration of any extension the Panel may grant to the Company following the hearing. At the hearing, the Company intends to present its plan to regain compliance with all applicable continued listing criteria and request an extension to do so. If the Panel denies the Company’s request for continued listing or if the Company is unable to evidence compliance within any extension of time that may be granted by the Panel, Nasdaq will provide written notification that the Company’s securities will be delisted and, as such, there can be no assurance that the Company will be able to maintain the listing of its securities on Nasdaq. If we are not able to regain compliance or maintain compliance, our common stock, warrants, and 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock (collectively our “securities”) will be suspended and subject to delisting from Nasdaq.
If our securities were delisted from Nasdaq, among other things, it would likely lead to a number of negative implications, including an adverse effect on the price of our securities, reduced liquidity in our securities, no market for our securities and no ability for you to sell our securities, greater difficulty in obtaining financing, potential loss of confidence by employees, loss of institutional investor interest and fewer business development opportunities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There have been no sales of unregistered securities within the reporting period that would be required to be disclosed pursuant to Item 701 of Regulation S-K, with the exception of the following:
Between January 18, 2023 and February 2, 2023, we issued to seven investors an aggregate of 280,625 shares of our common stock upon the special limited time offer to convert certain principal of outstanding senior secured convertible promissory notes at a discounted rate of 81% of the closing market price on the day the special notices were received. The weighted average conversion price was $5.71 per share and such shares were issued by us in reliance upon the exemption from registration available under Section 3(a)(9) of the Securities Act.
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Item 3. Default Upon Senior Securities
(a) Defaults Upon Senior Securities
In connection with our acquisition of Fastback on January 29, 2021, we issued to the sellers $11.2 million aggregate principal amount of convertible promissory notes that mature on January 29, 2026. There is a provision in the convertible promissory notes that an event of default could be declared if the Company fails to file its requisite its securities filings timely. The Company was delinquent with its Form 10-Q filings. To date, while the convertible promissory note holders have reserved their rights, the convertible promissory notes have not been declared in default, and the Company has a plan to regain compliance with such filings. Upon the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, the Company will be compliant with the filing requirement. No adverse actions have been taken against the Company and we expect none insofar as filing compliance is regained. During January 2023, pursuant to a limited time offer, certain Fastback convertible promissory note holders agreed to amend their notes and convert an aggregate of $1.3 million principal of their notes and $0.3 million of accrued interest into 280,625 shares of the Company’s common stock.
On May 27, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $11.0 million and warrants to purchase up to 18,200 shares of our common stock, par value $0.0001 per share, for a purchase price of $10.0 million (representing an original issue discount of 10.0% on the note), of which we received $5.0 million on May 28, 2021 and $5.0 million on June 2, 2021. On August 25, 2021, we entered into a first amendment and limited waiver to the securities purchase agreement dated as of May 27, 2021 and amended and restated the convertible note.
The amended note bears interest at the rate of 6% per annum from the date of funding and matures on May 27, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $611,000 each, commencing in November 2021. We had the right to make interest and principal payments in the form of shares of common stock, which shares will be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $77,000.
On August 25, 2021, we entered into a securities purchase agreement with an investor, pursuant to which we sold to the investor a senior secured convertible promissory note in the original principal amount of $5.8 million and warrants to purchase up to 13,158 shares of our common stock, par value $0.0001 per share (the “Common Stock”), for a purchase price of $5.0 million (representing an original issue discount of 16.0% on the note), which $5.0 million was received on August 26, 2021.
The note bears interest at the rate of 6% per annum from the date of funding and matures on August 25, 2023. We were required to make monthly interest and principal payments in 18 equal monthly installments of $322,000 each, commencing in November 2021. So long as shares of our common stock are registered for resale under the Securities Act of 1933, as amended, or may be sold without restriction on the number of shares or manner of sale, we had the right to make interest and principal payments in the form of additional shares of common stock, which shares would be valued at 90% of the average of the five lowest daily volume weighted average price per share of the common stock during the ten trading days immediately preceding the date of issuance of such shares of common stock. On or about April 15, 2022, this note went into default because the Company failed to timely file its Annual Report on Form 10-K. Pursuant to the terms of that note, a mandatory default amount of five percent (5%) of the outstanding principal amount was added to the principal amount. Additionally, the holder was able to demand, from time to time, repayment in the form of shares of common stock, which shares will be valued at 80% of the average of the three lowest daily volume weighted average price per share of the common stock during the twenty trading days immediately preceding the date of issuance of a notice of conversion. As of the date of this filing, this note had a remaining combined principal and interest balance of approximately $185,000.
In November 2019, DragonWave entered into a secured loan agreement with an individual lender pursuant to which DragonWave received a $2.0 million loan that bears interest at the rate of 9% per annum and originally matured on November 26, 2021. Accrued interest is calculated on a compound basis and is payable semi-annually in May and November of each year. Principal was due in full at maturity but can be prepaid in full or in part without penalty. The loan is secured by all of the assets of DragonWave and is guaranteed by ComSovereign Corp. In January 2021, a total of $1.0 million of principal of this note, plus all related accrued interest and charges, was extinguished in exchange for shares of common stock and warrants to purchase shares of common stock. In January 2022, a total of $500,000 was paid to the note holder. As of the date of this filing, this note had a remaining principal balance of $500,000.
(b) Material Arrearage in the Payment of Dividends.
On October 29, 2021, the Company sold in a public offering 320,000 shares of the Company’s newly-designated 9.25% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), at a public offering price of $25.00 per share, which is the initial liquidation preference of the Series A Preferred Stock.
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The Series A Preferred Stock has been listed on The Nasdaq Capital Market under the symbol “COMSP”.
Dividends at the rate of 9.25% per annum of the $25.00 liquidation preference per share (equivalent to an annual rate of $2.3125) on the Series A Preferred Stock are payable monthly in arrears on or about the twentieth (20th) day of each month. Dividends on the Series A Preferred Stock are cumulative. The Company paid dividends commencing on or about November 20, 2021, and paid the monthly dividend through May 20, 2022.
On or about May 25, 2022, the Company announced that it had suspended the payment on the Series A Preferred Stock to preserve cash. Since June 20, 2022, dividends on the Series A Preferred Stock are accruing at the rate of approximately $61,664 per month. The total arrearage on the date of filing for the accrued dividends is approximately $1,171,616.
Holders of the Series A Preferred Stock generally have no voting rights, except for limited voting rights, including if the Company fails to pay dividends on the Series A Preferred Stock for 18 or more monthly periods (whether or not consecutive). On November 18, 2023, we reached 18 monthly periods of dividend arrears. Therefore, the holders of shares of the Series A Preferred Stock will be entitled to vote at either (i) a special meeting called upon the written request of the holders of at least 25% of the Series A Preferred Stock or (ii) at our next annual meeting and each subsequent annual or special meeting of stockholders for the election of two additional directors to serve on our board of directors until all unpaid dividends with respect to the Series A Preferred Stock have been paid.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
The following documents are filed as a part of this report or incorporated herein by reference:
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COMSovereign Holding Corp. | |
| Date: January 9, 2024 | /s/ David A. Knight |
| David A. Knight | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: January 9, 2024 | /s/ David A. Knight |
| David A. Knight | |
| Acting Principal Financial and Accounting Officer |
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