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 Part II of this Quarterly Report as well as our fiscal 2021 Annual Report on Form 10-K filed with the U. S. Securities and Exchange Commission (the "SEC") on August 16, 2022.

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, 2022, compared to the three months ended March 31, 2021, 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:

? Telecom and Network Products and Solutions. We design, develop, market and sell

products for telecom network operators, mobile device carriers and other

enterprises, including the following:






                                       23

? 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.

? In-Band Full-Duplex Technologies. We have developed proprietary wireless

transmission technologies that alleviate the performance limitations of the

principal transmission technologies used by most networks today. Time Division

Duplex ("TDD") transmission technology used by many communications systems

utilizes a single channel for transmission of data alternating between

downlink or uplink, which limits capacity/throughput. Frequency Division

Duplex ("FDD") technologies in the marketplace today use two independent

channels for downlink and uplink but require twice the spectrum. Neither TDD

nor FDD can simultaneously transmit and receive on a single channel - a

limitation that network advancements and 5G will require for optimal


    performance.

? Edge Compute Capable Small Cell 4G LTE and 5G Access Radios. We offer both

4G/LTE and 5G New Radio ("NR") based small cell radios that are designed to

connect to other access radios or to connect directly to mobile devices such

as mobile phones and other Internet-of-things devices. Recently, we developed

we believe the world's first fully-virtualized 5G core network on a

microcomputer the size of a credit card, enabling, for the first time, the

ability to have the 5G network collocated on the network edge with the small

cell communicating with the devices themselves. The small cells 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. Our recently-acquired HoverMast

line of quadrotor-tethered drones feature uninterruptible ground-based power,

fiber optic communications for cyber immunity, and the ability to operate in

GPS-denied environments while delivering dramatically-improved situational

awareness and communications capabilities to users.

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.

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

Through a series of acquisitions, we have expanded our service offerings and geographic reach over the past three years. On November 27, 2019, we completed the acquisition of ComSovereign Corp. ("ComSovereign") in a stock-for-stock transaction with a total purchase price of approximately $80 million (the "ComSovereign Acquisition"). ComSovereign had been formed in January 2019 and, prior to its acquisition by our company, had completed five acquisitions of companies with unique products in development for, or then being marketed to, the telecommunications market. As a result of our acquisitions, our company is comprised of the following principal businesses, each of which was acquired to address a different opportunity or sector of the telecom infrastructure and service market. These acquired entities are designated as CORE and Noncore businesses. Our CORE business is comprised of our network hardware and software products and services solutions, and our Noncore business is comprised the Drone and related products. Our Power division has been idled.





                                       24

Our CORE business is comprised of the following acquisitions:





  ? DragonWave-X LLC. DragonWave-X, LLC and its operating subsidiaries, DragonWave
    Corp. and DragonWave-X Canada, Inc. (collectively, "DragonWave"), are a
    Dallas-based 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, transferred the
    employees and assigned the Canadian lease of DragonWave's Canadian subsidiary,
    to a third party.




  ? 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 VNC in July
    2020.




  ? 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.




  ? Silver Bullet Technology, Inc. Silver Bullet Technology, Inc. ("Silver
    Bullet") is a California-based engineering firm that designs and develops 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.




  ? Lextrum, Inc. Lextrum, Inc. ("Lextrum") is a Tucson, Arizona-based developer
    of full-duplex wireless technologies and components, including
    multi-reconfigurable radio frequency ("RF") antennae and software programs.
    This technology enables the doubling of a given spectrum band by allowing
    simultaneous transmission and receipt of radio signals on the same
    frequencies. ComSovereign acquired Lextrum in April 2019 prior to the
    ComSovereign Acquisition.




  ? VEO Photonics, Inc. VEO Photonics, Inc. ("VEO"), based in San Diego,
    California, is a research and development company 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 was idled in June
    2022.




  ? RF Engineering & Energy Resource, LLC. RF Engineering & Energy Resource, LLC
    ("RF Engineering") is a Michigan-based provider of high-quality microwave
    antennas and accessories. By providing one of the industry's lowest cost of
    ownership, RF Engineering has continued to innovate and expand, and it
    recently announced the industry's first Universal Licensed Microwave Antenna.
    Supporting frequencies from (6-42 GHz), customers can now reduce sparing costs
    and safely future-proof their networks by leveraging this new Universal plug
    and play architecture. We acquired RF Engineering in July 2021.




  ? SAGUNA Networks Ltd. SAGUNA Networks Ltd. ("SAGUNA") 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 was idled
    in June 2022.




                                       25

Our NONCORE business is comprised of the following:





  ? Drone Aviation. Lighter Than Air Systems Corp., which does business under the
    name Drone Aviation ("Drone Aviation"), is based in Jacksonville, Florida and
    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.




  ? Sky Sapience Ltd. Sky Sapience Ltd. ("SKS") is an Israeli-based manufacturer
    of drones with a patented tethered hovering technology that provides
    long-duration, mobile and all-weather ISR capabilities to customers worldwide
    for both land and marine-based applications. Its innovative technologies
    include fiber optic tethers that enable secure, high-capacity communications,
    including support for commercial 4G and 5G wireless networks. SKS's flagship
    HoverMast line of quadrotor-tethered drones feature uninterruptible
    ground-based power, fiber optic communications for cyber immunity, and the
    ability to operate in GPS-denied environments while delivering dramatically
    improved situational awareness and communications capabilities to users. We
    acquired SKS in March 2021. In order to conserve cash, SKS was idled in June
    2022.




  ? RVision, Inc. RVision, Inc. ("RVision") is a California-based developer of
    technologically advanced video and communications products and physical
    security solutions designed for government and private sector commercial
    industries. It has been serving governments and the military for nearly two
    decades with sophisticated, environmentally rugged optical and infrared
    cameras, hardened processors, custom tactical video hardware, software
    solutions, and related communications technologies. It also has developed
    nano-defractive optics with integrated, artificial intelligence-driven
    electro-optical sensors and communication network connectivity products for
    smart city/smart campus applications. We acquired RVision in April 2021.

Nasdaq Compliance Developments

As previously disclosed in our Form 10-K filed on August 16, 2022, and in subsequent Form 8-K filings, we are not in compliance with Nasdaq Listing Rule 5550(a)(2), the $1.00 minimum closing bid price requirement ("minimum bid price") due to the price of our common stock. Additionally, because we were late with filing our Quarterly Reports on Form10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022 (collectively the "Delinquent Reports"), we are not in compliance with 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").

On November 17, 2022, a hearing was held before the Nasdaq Hearings Panel (the "Panel") regarding our request for continued listing on The Nasdaq Capital Market of our common stock and additional time to regain compliance with Nasdaq Listing Rules. On November 29, 2022, the Panel issued its determination, granting our request for the continued listing of our common stock, subject to evidencing compliance with Nasdaq's minimum bid price requirement by February 2, 2023, and evidencing compliance with Nasdaq's filing requirement by getting our remaining Delinquent Reports filed with the SEC by February 24, 2023, and certain other conditions.

We are working to file our Delinquent Reports with the SEC as soon as practicable and are otherwise taking definitive steps to evidence compliance with all other applicable criteria for continued listing on Nasdaq. We have put forth a reverse split proposal to our stockholders to be voted on at our Annual Stockholders meeting on January 18, 2023, as part of our efforts to gain compliance with the minimum bid price requirement. There can be no assurances, however, that we will be able to gain compliance with the Nasdaq Listing Rules.

Significant Components of Our Results of Operations





Revenues

Our revenues are generated primarily from the sale of our products, which consist primarily of telcom hardware, repairs, support & maintenance, drones, injection moulding, tooling, 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.





                                       26

During the three months ended March 31, 2022 and 2021, approximately 16% and 17%, respectively, of our revenues were derived from sales outside of North America. 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 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 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. We expect our research and development costs to continue to increase as we develop new products and modify existing products to meet the changes within the telecom landscape.





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.





General and Administrative

In addition to personnel costs, general and administrative expense consists 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.





                                       27





Interest Expense

Interest expense is comprised of interest expense associated with our secured notes payable, notes payable and senior convertible debentures. The amortization of debt discounts is also recorded as part of interest expense.





Share-Based Compensation

Share-based compensation consists of expense related to the issuance of equity instruments, which can be in many forms, such as incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including performance-based awards under our long-term incentive plans or outside of such plans. The expense related to any share-based compensation grant is allocated to specific groupings in the condensed consolidated statement of operations in the same manner as the grantee's normal compensation expense and will vary depending upon the number of underlying shares of common stock, the fair value of the common stock on the date of grant and the vesting period.

Restatement for Correction of an Error

The Company has determined that it was necessary to amend the March 31, 2022 Form 10-Q in order to restate the financial statements to correct the previously misstated amortization of intangible assets. See Note 18 - Restatement of Financial Statements included in the financial statements herein for additional details.

In addition to the restatement of the financial statements, certain information within the following notes to the condensed consolidated financial statements have been restated to reflect the correction of the misstatement discussed above as well as to add disclosure language as appropriate to the following footnotes:

? Note 1. Description of Organization and Business and Restatement (as restated)

? Note 3. Going Concern (as restated)

? Note 18. Restatement of Financial Statements (as restated)

Results of Operations (As Restated)





                                                                   For the Three Months Ended
                                                                            March 31,
(Amounts in thousands, except share and per share data)             2022                 2021
                                                               (as restated)

Revenue                                                        $        3,229       $        2,086
Cost of goods sold                                                      2,196                1,074
Gross profit                                                            1,033                1,012
Operating income (expense)
Research and development (1)                                            1,172                  547
Sales and marketing (1)                                                    66                   48
General and administrative (1)                                          6,157                7,135
Depreciation and amortization                                             890                3,661
Gain on the sale of assets                                             (8,441 )                (83 )
Total operating income (expenses), net                                   (156 )             11,308
Income (loss) from operations                                           1,189              (10,296 )
Other expense
Interest expense                                                         (880 )               (469 )
Other expense                                                               -                  (13 )
Loss on extinguishment of debt                                           (173 )             (5,348 )
Gain on sale of building                                                    -                    -
Foreign currency transaction loss                                           -                  (80 )
Total other expense                                                    (1,053 )             (5,910 )
Net income (loss)                                              $          136       $      (16,206 )

(1) These are exclusive of depreciation and amortization






                                       28

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021





Total Revenues

For the three months ended March 31, 2022, total revenues were $3.2 million compared to $2.1 million for the three months ended March 31, 2021, an increase of $1.1 million, or 55%. These sales derived primarily from mobile network backhaul products, outside sales from Sovereign Plastics, and the sale of our aerostat products and accessories. The increase was driven primarily from revenue from companies acquired in 2021 and from large orders fulfilled by Sovereign Plastics.

Cost of Goods Sold and Gross Profit

For the three months ended March 31, 2022, cost of goods sold were $2.2 million compared to $1.1 million for the three months ended March 31, 2021, an increase of $1.1 million, or 104%. Cost of goods sold primarily consisted of the payment to our contract manufacturer for the production of our mobile network backhaul products and the materials, parts and labor associated with our other manufacturing activities.

Gross profit for the three months ended March 31, 2022 was $1.0 million compared to $1.0 million for the three months ended March 31, 2021, with a gross profit margin for the three months ended March 31, 2022, of 32% compared to 49% for the three months ended March 31, 2021. This decrease in gross profit margin was driven primarily by the sale of older DragonWave products that were lower margin during the current quarter as compared to the corresponding period in the fiscal year 2021 and an increase in purchase price variances due to increased prices from manufacturing and logistical suppliers, resulting from current macro supply chain constraints.

Research and Development Expense

For the three months ended March 31, 2022, research and development expense was $1.2 million compared to $0.5 million for the three months ended March 31, 2021, an increase of $0.7 million. Research and development expense consisted primarily of contract labor and payroll related costs. This increase was primarily for development of DragonWave radio software features, VNC 5G ORAN system product development, VEO photonics chip development. The expenses are mostly contractor labor and our own engineering teams.





Sales and Marketing Expense

For the three months ended March 31, 2022, sales and marketing expense was $66,000 compared to $48,000 for the three months ended March 31, 2021, an increase of $18,000, which primarily consisted of increases in payroll and related costs performed primarily by our newly acquired subsidiary.

General and Administrative Expenses

For the three months ended March 31, 2022, general and administrative expense was $6.2 million compared to $7.1 million for the three months ended March 31, 2021. This $0.9 million decrease primarily consisted of decreases in professional expenses of $2.2 million, which were primarily driven by decreases in certain public relations services, accounting services, and other professional services. This was partially offset by increased payroll and related costs of $1.2 million due to additional employees and salary increases, plus rent increased by $0.2 million, resulting from the sale and leaseback of our Tucson (Arizona) office building (the "Tucson Building"; see below) on or about January 31, 2022.

Depreciation and Amortization (As Restated)

For the three months ended March 31, 2022, depreciation and amortization was $0.8 million compared to $3.6 million for the three months ended March 31, 2021, a decrease of $2.8 million, primarily due to the sale of our Tucson Building (see below) and the 2021 year-end impairment of intangible assets.





Gain on the Sale of Assets

For the three months ended March 31, 2022, gain on the sale of assets was $8.4 million compared to $0.1 million for the three months ended March 31, 2021, an increase of $8.3 million. On January 31, 2022, we sold our Tucson Building for $15.8 million of cash. The Tucson Building had a carrying value of $6.7 million. The Company recognized an $8.4 million gain on sale of assets, which is net of $0.7 million of related transaction costs.





Other Income and Expenses

For the three months ended March 31, 2022, other expense was $1.0 million compared to other expense of $5.9 million for the three months ended March 31, 2021, a decrease of $4.9 million. This change primarily consisted of a decrease in the loss on extinguishment of debt of $5.1 million during the three months ended March 31, 2021, partially offset by a $0.4 million increase in interest expense.

Net income (loss) (As Restated)

For the three months ended March 31, 2022, we had a net income of $0.1 million compared to a net loss of $16.2 million for the three months ended March 31, 2021, related to the items described above.





                                       29

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, 2022, we had $0.5 million in cash compared to $1.9 million on December 31, 2021, a decrease of $1.4 million resulting primarily from $8.7 million of cash used in operating activities and $7.6 million of debt repayments, partially offset by $15.1 million of cash proceeds from the sale of the Tucson Building on or about January 31, 2022. See Note 10 - Property and Equipment, Net in the notes to the condensed consolidated financial statements for more information related to the sale of the Tucson Building.

As of March 31, 2022, we had working capital of $8.5 million compared to negative working capital of $3.5 million as of December 31, 2021. This increase in working capital of $12.0 million was primarily related to the $15.1 million of proceeds from the sale of the Tucson Building and the reclassification of $5.5 million of debt from a current liability to a long term liability due to the subsequent conversion of such debt into equity, partially offset by the $7.6 million of repayments to debt holders.

As of March 31, 2022, we had undiscounted obligations relating to the payment of indebtedness as follows:

? $8.6 million related to indebtedness that is due during the remainder of 2022;

? $1.0 million related to indebtedness that is due during 2023;

? $0.1 million related to indebtedness that is due in the first quarter of 2023;


   and

? $11.3 million related to indebtedness that is due in 2026 or thereafter.

Subsequent to March 31, 2022, the following developments should be noted:

? of the $9.6 million of indebtedness that is due during 2023/2022, $8.45 million

was converted into common stock and $0.6 million was canceled;

? of the $11.3 million of indebtedness that is due in 2026 or thereafter, $11.2

million entered technical default and the holders sent us a letter indicating

that they were reserving their rights, but to date that haven't declared a


   default;

? additional promissory notes with a face value of $1.3 million were 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. For the three months ended March 31, 2022, we used cash flows in operating activities of $8.7 million, we had an accumulated deficit of $219.0 million and we had working capital of $8.5 million.

Our fiscal 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 due to our Nasdaq compliance issues, 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. 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.





                                       30





Lines of Credit and Debt

Summary information with respect to our debt or other credit facilities is set forth in Note 12 - Debt of the notes to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report.

Sources and Uses of Cash (As Restated)





                                                                 For the Three Months Ended
                                                                          March 31,
(Amounts in thousands)                                            2022                2021
Cash flows used in operating activities                        $    (8,719 )       $   (14,207 )
Cash flows provided by (used in) investing activities               14,909              (7,837 )
Cash flows (used in) provided by financing activities               (7,587 )            32,285
Net (decrease) increase in cash and cash equivalents           $    (1,397 )       $    10,241

Operating Activities (As Restated)

For the three months ended March 31, 2022, net cash used in operating activities was $8.7 million. Net cash used in operating activities primarily consisted of the net income of $0.1 million, which was partially offset by deductions for net non-cash gains of $5.9 million, and net cash used to fund changes in the levels of operating assets and liabilities of $2.9 million.

For the three months ended March 31, 2021, net cash used in operating activities was $14.2 million. Net cash used in operating activities primarily consisted of the net operating loss of $16.2 million, which was partially offset by adjustments for non-cash expenses of $10.7 million, and net cash used to fund changes in the levels of operating assets and liabilities of $8.7 million.





Investing Activities

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.

For the three months ended March 31, 2021, net cash used in investing activities was $7.8 million. Investing activities primarily consisted of net cash used to (a) fund business acquisitions of $4.2 million, (b) acquire property and equipment of $1.9 million, and acquire intangible assets of $1.7 million.





Financing Activities

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.

For the three months ended March 31, 2021, financing activities provided cash of $32.3 million. Financing activities primarily consisted of net proceeds from the sale of common stock from the public offerings of $39.7 million, which was offset by the repayment of debt of $6.4 million, the repayment of related party notes of $0.8 million and issuance costs of $0.2 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.





                                       31

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, 2021.

However, it should be noted that business developments commencing in the second quarter of 2022 (see Note 19 - Subsequent Events - Business Developments) in the footnotes to the unaudited consolidated financial statements herein, included discussions of exiting or idling of certain businesses and/or assets, in periods subsequent to March 31, 2022. During the current quarter, the Company determined that it was not more likely than not that any reporting unit's fair value was below that reporting unit's carrying amount. Accordingly, it wasn't necessary to perform interim impairment testing as of March 31, 2022. However, given the constraints of capital resources that manifested themselves subsequent to March 31, 2022, the resulting weakness in the business and challenges with the economy, we may need to record future impairments of our long-lived assets and or goodwill, based on our assessment in future periods.

Consequently, for the purpose of emphasis, we are again disclosing below our accounting policy related to 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.

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.

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